"Discounted but not forgotten" - that's the general feeling in the markets as we near the end of yet another volatile week. While the macro economic risks have not dissipated, the view appears to be that they have been adequately discounted. The pessimism seems to have reached a palpable saturation point that pushed global equity valuations to very attractive levels luring buyers back in.Equities continue to rebound off lows focusing on signs of stability in the global economic environment, while keenly focused on the upcoming earnings season next week. Barring an late-day Friday sell-off, U.S. equity markets are on track to close one of the strongest weeks since mid-April. U.S. equity futures are fluctuating with little direction as the headlines slow.
The "signs" market participants are focusing on include narrowing spreads against sovereign defaults, higher interest rates in several Asian countries (So. Korea, Malaysia, Taiwan, and India), and a rebound in commodity prices.
The question will be will earnings results and forward guidance from the U.S. corporate sector be enough to sustain the reversal. We anticipate Q2 results will be further confirmation of an earnings recovery. Earnings for the S&P 500 are expected to grow 34% on a year/year basis.
Europe is trading higher across broad as the mood lightens and risk aversion subsidies. A stronger than expected French manufacturing report for May is helping by suggesting an improvement in global trade. ECB President, Jean-Claude Trichet, has commented that while the fiscal crisis isn't over, the economic signs are "encouraging".
Crude is back comfortably in the $75 per barrel level. The upward push is being driven by renewed optimism on the back of the IMF global growth revision. Meanwhile, natural gas declined despite record temperatures after the Dept of Energy's weekly inventory reports showed storage levels rose by 78 bln cubic feet to 2.76 tcf. Copper has reversed back up to its 50 day sma at $302.60 per pound.
The U.S. Federal Appeals court upheld the lower's courts ruling that rejecting the moratorium on deepwater drilling. The verdict does not come as a surprise as such is causing little change in drillers' shares premarket. The Obama administration was seeking to reinstate the moratorium, while it challenged an order by the U.S. District Court in Louisiana on May 27. It's unclear whether deepwater utilization levels will go back to prior levels. The economics of offshore deepwater drilling have certainly changed.
Shares of search-engine giant Google (GOOG) gained after the company said the Chinese government renewed its Internet license. The company had submitted a revised application (which includes redirects to non-filtered Hong Kong site) to meet regulations in China ending a six-month standoff over censorship.
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