Monday, June 14, 2010

Investor Optimism Prevails

Growing optimism continues to support equity markets globally. The rally is being supported by better economic data, indicating the recovery remains on track. The balance between sovereign debt/contagion fears and good market fundamentals continues. The scales remain tipped in favor of equities, for now.
Today, U.S. equity futures are taking their lead from investor optimism that began in Asia and extended into the European markets. 

European equities remain in recovery mode with the exception of BP (BP), for which a deadline expires today to raise the oil-containment cap. Economic data is the primary catalyst driving gains in Europe. Industrial production in the European Union rose 0.8% -- the 11th consecutive month of gains. The euro is rallying against the greenback, trading at 1.2246 after hitting a low of 1.1877 on June 7.

The economic-induced optimism is causing a rebound in the so-called risk trade. As such, crude oil prices have rebounded, trading comfortably in the mid $70 per barrel level. But a rising risk appetite is not the only reason crude is higher. Improved economic data is lifting expectations for oil consumption, as well as commodity demand in general. Copper, a global barometer of economic growth expectations, has gained nearly 10% to $300.35 per ounce over the last week. Gold continues to hover around $1224 per ounce.
While the markets are focusing on the economic data for upside catalysts, the risks remain. The likelihood of a Greece default remains as evidenced by enduring high spreads (CDS spreads at 730 bps). The euro has rebounded on economic data, but the eurozone may just be trading on borrowed time. Greece's Prime Minister, George Papandreou, continues to attempt to stem fears. He stated late Friday that his government made a conscious decision against leaving the euro and pledged to return to growth and pay its dues.

While there is no key U.S. economic data out today, the pace picks up this week. Specifically, reports that are likely to hold court over the market include PPI/CPI, housing starts, and industrial production.

Notable upgrades/downgrades included Citigroup raising Pulte Group (PHM) to a Buy from Hold; Collins Stewart upgrading steel giant ArcelorMittal (MT) to Buy from Hold; UBS upping Equity One (EQY) to Neutral; and Goldman taking down El Paso Electric (EE) to Sell.

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