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Markets moved sharply this week, as earnings announcements and news from Europe hit the tape.Headlines that Mario Draghi would do “whatever it takes to preserve the euro” sent both Italian and Spanish exchanges higher, after both had been crushed early in the week.
In the U.S., earnings from heavy-weights like Caterpillar, Boeing, Apple, and UPS rocked indices, particularly after the iPhone manufacturer reported a rare earnings miss.
Analysts and traders across the street weighed in on what it all meant for the U.S. economy.
'It's not obvious to me why Spain needs a full bailout, particularly when it comes to IMF bailouts; it's still not obvious to me why the IMF is that involved. The euro area on a regional basis has no current account balance of payment deficit,' he said. 'I don't really think this is a real problem with Spain. It's just the latest one in the chain--it's the system itself that is falling apart.'
'How can it possibly be that the housing market is showing a durable recovery when it is still taking a median of eight months for the builders to find a buyer upon completion of the unit? Up until April 2008 -- in the midst of the Great Recession -- a number this high was unheard-of, having happened but once previously and that was the peak of the previous housing market meltdown in June 1991.'
'However, if the announcement of QE3 is met with cheer in the stock market and commodities, we can expect a knee jerk reaction of higher rates and higher inflation expectations, though it appears that stocks are already pricing in high odds of QE3. We could see an increase of 15bp-20bp in 10y rates if risky assets applaud the Fed easing step.'
'Stress has returned to Europe, but the stakes are higher. Spain (let alone Italy) is not Greece: its economic size, the cost of a rescue, and the increased market scepticism about temporary fixes suggest that the policy response needs to include some of the political and institutional reforms that prior crises have not changed.'
'Despite being fully aware of this historical pattern of conservative corporate guidance heading into earnings season, we were admittedly a bit concerned about how the reports might turn out for this quarter, especially given elevated margins and the troublesome outlook from leading macro data.'
'...The recent and ongoing world financial crisis pales in comparison with these events. And it is important to appreciate why. Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements. And then, too, there are auditors, lawyers and regulators.'
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'The softness in the manufacturing / industrials and basic materials/oil and gas sectors is the most worrisome trend as Western service sectors are in any case already seeing either very weak or close to zero trend growth.'
'A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone.'
'In practice, however, the situation is much more complicated and not so benign,' said El-Erian. 'Simply put, lower borrowing costs are not enough to convince companies to expand given the list of domestic, regional and global uncertainties; indeed, many of these companies are far from credit rationed as they sit on huge cash balances.'
'In the aftermath of all these debt-induced panics, long-term Treasury bond yields declined, respectively, from 3.5%, 3.6% and 5.5 % to the extremely low levels of 2% or less in all three cases (Chart 2). The average low in interest rates in these cases occurred almost fourteen years after their respective panic years with an average of 2%. The dispersion around the average was small, with the time after the panic year ranging between twelve years and sixteen years.'
'We track demographics. We were more bullish than anybody in the 1990s and 2000s because we saw this giant generation spending more money, borrowing more money, technologies, internet rising. Now, it's the opposite.'
'At 13-13.5x 2012E EPS, valuations are supportive but not rock bottom. Given elevated short interest and defensive to bearish investor positioning, risk has already been taken down significantly, but there are no signs of panic and equity outflows could restart.'