[Chart courtesy of MarketWatch.com]
After some big gains yesterday, markets returned to more stability today. The S&P 500 inched up 0.11% while European indices such as the DAX were in the green. In addition, the Euro was essentially flat, sticking to $1.31/Euro.
Although the VIX dropped over 3% to fall below 18, the 10-year Treasury dipped to a yield of 1.83%. Thus, although we’ve seen a substantial decrease in equities volatility in the last couple months, investors have been flooding into Treasuries. From this standpoint, we’re in a risky investment landscape.
In Europe, Greek debt restructuring discussions have hit a temporary standstill. The question is now whether Greece can implement wage and pension reform, an impediment to its ability to pay down its debt while reducing the country’s competitiveness.
Ultimately, I believe Greece lacks the wherewithal to regain economic strength if it stays in the Eurozone. Even if it receives bailout funds, the looming prospect of a future disorderly default is simply too great a risk.
After consistent refusal to provide aid to Europe, China is now considering offering aid via the IMF to help Europe solve its debt woes. Perhaps China has come to realize that its future is linked to Europe in that an economically deficient Europe will adversely impact its export capabilities. With $3.18 trillion in foreign exchange reserves, I think it’s safe to say China is in a position to help.
In some positivity out of Europe, French and Spanish borrowing costs went down. But this doesn’t detract from a long-term negative outlook.
Running out of options to improve the U.S. economy, Bernanke stressed the need to reduce the U.S. debt load before Congress. However, he emphasized that austerity measures or tax hikes would only thwart economic recovery efforts. Unfortunately, this is much easier said than done once you add politicians into the mix.
Additionally, despite the fact that the 30-year mortgage rate once again hit a new low of 3.87%, it hasn’t been enough to kick start the housing market, which is a critical element of the recovery.
With tomorrow’s jobs numbers coming out, we’ll have to see if there’s a major sea change in store for the markets or if current upward momentum can continue.