Goin’ down to the crossroads
“I went down to the crossroads, fell down on my knees
Down to the crossroads, fell down on my knees
Asked the Lord above for mercy,
‘Save me if you please'” Cream/Robert Johnson 1968/1936
Global markets are now “goin’ down to the crossroads” as described in the 1936 blues classic written by Robert Johnson and then made world famous by iconic rock band Cream in 1968. According to legend, blues man Robert Johnson sold his soul to the devil at midnight at the intersection of U.S. Route 61 and U.S. Route 49, along the Blues Highway near Clarksdale, Mississippi, in a Faustian deal to become a blues legend.
Today, global financial markets look to central bankers to save them once more from gathering recession, high unemployment and the threat of a new bear market.
On My Wall Street Radar
chart courtesy of StockCharts.com
In the chart above, we see how the S&P 500 (NYSEARCA:SPY) is “at the crossroads.”
In a trading range between 1315-1380, the index is moving sideways with declining momentum as RSI and MACD start to flatten and a declining 50 day moving average (blue) edges slowly closer to the 200 day average (red) rising from below.
If global central bankers answer the plea for “save me, if you please,” we could see a break to the upside and resumption of the upwards trend, while silence at midnight or insufficient intervention will likely lead to lower prices ahead.
The Economic View From 35,000 Feet
Last week’s big news was Friday’s Non Farm Payrolls Report which was ugly, ugly, ugly. New jobs in June came in at 80,000, widely missing expectations and well below the 100,000 needed just to keep unemployment steady. Overall unemployment was unchanged at 8.2% and U6, which includes part-timers who want full time work and those who have given up looking, ticked slightly higher to 14.9%, a gain of 0.1%. Long term unemployment remains grim, with 5.4 million of our fellow Americans now unemployed longer than 27 weeks, a number that has has barely budged year to date. 12.7 million of our countrymen remain unemployed, and the three month average new jobs rate is now 78,000, just more than half of 2011′s average as employment gains markedly slow.
Economic data released last week was weak, as well, as ISM Manufacturing dropped to 49.7, entering contraction territory for the first time in three years and ISM services fell to 52.1, missing expectations.
Overseas, the post summit euphoria faded as Spanish and Italian bond yields spiked and German 2 year notes paid 0% interest. See“Lights Out For Europe Means Bad News For United States.”
In Spain, Prime Minister Mariano Rajoy is getting downright desperate as he wants the European Union to come through on the promises made at the recent Euro summit since Spain’s 10 year bond yield spiked back towards 7% last week. Markets were disappointed at the European Central Bank’s action On Jluy 5th which included interest rate cuts but no bond buying to lower Spanish or Italian bond rates. European leaders will take another shot at containing this long running crisis when finance ministers meet again on July 9th.
Global purchasing managers’ indexes continue to decline with the JP Morgan Global Manufacturing PMI falling from 50.6 in May to 48.9 in June, placing it below the all important 50 level that is the demarcation line between expansion and contraction. This is the lowest level in three years as the global economy continues to slow.
For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) dropped 0.8%, the S&P 500 (NYSEARCA:SPY) declined 0.6% and the Nasdaq Composite (NYSEARCA:QQQ) climbed 0.1%. The Russell 2000 gained 1.2%. Germany, the most powerful economy in Europe, saw its ETF, iShares MSCI Germany Index (NYSEARCA:EWG) drop 2.7% from last Friday’s close.
Global markets largely ignored central bank intervention last week as the Bank of England started another round of quantitative easing, China’s central bank lowered interest rates and the European Central Bank lowered its benchmark interest rate and cut the rate on deposits to 0%.
Upcoming economic data is lighter with consumer credit on Monday, job openings and NFIB small business index on Tuesday, FOMC minutes Wednesday, weekly jobs on Thursday and University of Michigan Consumer Sentiment on Friday. We’ll also see the start of earnings season with Alcoa on Monday and JP Morgan on Friday as the most closely watched early reports.
Earnings outlooks have been mostly negative with more than 90 S&P companies reporting negative guidance. When compared to positive outlooks, this quarter’s earnings forecast is shaping up to be the bleakest in eleven years.
Ford shocked markets last week with its estimate that second quarter losses will be three times larger than first quarter and it was joined by consumer giant Procter and Gamble, Starbucks, Texas Instruments, Adobe, FedEx and Bed, Bath and Beyond all issuing lower guidance.
Bottom line: Last week saw significant central bank intervention by the People’s Bank of China, the Bank of England and the European Central Bank that world markets completely ignored. Just two weeks have passed since the Federal Reserve extended “Operation Twist” on June 29th. Unlike periods following previous episodes of monetary easing, the S&P 500 is 0.5% below its closing level at the conclusion of the Fed meeting. World markets are now going down to the crossroads praying, “save me if you please.”