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Here’s another very good characterization of the market from JPMorgan’s new ‘Look At The Week Ahead’ note.It basically describes a market caught between two competing trends. One is slowing growth. The other is (possibly) a Europe that’s stepped away from the brink. The question for bulls is: How much can the latter beat out the former.
The May hysteria (sparked by the first Greek election and subsequent investor fears of an imminent EMU break-up) has settled and as of Friday sentiment is (once more) cautiously optimistic with respect to Europe. The best investors can hope for at this point is a “re-containment” of the debt crisis and a removal of it as a systemic overhang (similar to what occurred in late 2011 and early 2012 in the wake of the LTROs). Even if that were to occur though a lot has happened in the last few months since Spain first confirmed to markets it would miss its 2012 fiscal targets (marking the starting point of this latest iteration of the European saga). Growth globally is cooling. European numbers have been poor for a while but both the world’s big emerging markets and the US have posted growth figures below market expectations (although the economic calendar was pretty light in the last week). China’s economic outlook in particular has come under scrutiny and the Shanghai Comp has suffered as a result (the SHCOMP fell 6% in June, the world’s worst performing big market).
Corporates haven’t been immune to the slowing. A slew of firms have notified investors lately of poorer growth outlooks, inc. Siemens, EMR, Ford, and others this week alone. Siemens’ CFO lamented to the WSJ this week about how the co’s short-cycle businesses have been “considerably weaker than we had been originally thinking”. Beyond Europe, economics, and earnings, investors increasingly are starting to focus on the world’s other big source of “macro” uncertainty: the US. Following the passage of the Highway and Student Lending bills Friday, Washington is essentially shut down until the elections on Nov 6 (this wouldn’t be a huge deal other than the fact that important decisions have to be made on the “fiscal cliff” and debt ceiling). Bottom Line on this market: apathy, paralysis, and more range-bound.