Market Perspective for June 8, 2015

The Greece debt crisis continues on for another week. On Friday, Prime Minister Tsipras blamed creditors for the lack of a deal and over the weekend, European Commission President Juncker blamed Tsipras. Europe is holding up the last tranche of bailout money, which Greece needs to pay creditors in June, July and August. Beyond these months, Greece will need another 30 billion euros to pay creditors through 2016. Opposition to a bailout is rising in Greece because creditors are demanding austerity. A rebellion within Tsipras’ own Syriza party threatens any deal. The minister for energy and the environment had this to say last week:

“I do not think that Syriza will accept for the country and its people to be exterminated inside the eurozone. A third consecutive austerity loan programme will be the most destructive option possible for Greece.”

With a slim majority in parliament, Tsipras will need opposition support to pass a deal if one even emerges. At best, we’re looking at a few months reprieve from the debt crisis, only to have it resume later in the year as the need for more cash arises.

For the moment, speculators are bidding up the euro, signaling a deal is expected. Euro bulls were helped on Monday when President Obama said the strong dollar was a problem. The White House later denied the President said it. The dollar dropped sharply on the President’s comments, but the better explanation for the rise in the euro is traders expect a deal between Greece and creditors.

Interest rates are a key number to watch this week. The 10-year treasury yield finished last week at 2.4 percent, while the 5-year yield hit 1.75 percent on Friday. Only a week earlier, the 5-year was at 1.475 percent. The yield on the 5-year has been in a trading range since 2013, with a high of 1.875 percent hit in September 2014. If last week’s rally continues into this week, the 5-year could breakout to the upside.

Rising interest rates have been great news for the financial sector, with bank stocks (in ETFs such as KBE and IAT) breaking out to the upside. Brokers and capital markets are also performing well (FSLBX, IAI and KCE), while the insurance sub-sector is on the verge of hitting new 52-week highs.

The broader indexes were mostly down last week, though the small-cap Russell 2000 gained more than 1 percent. The Russell 2000 is now closer to a new all-time high than the S&P 500 Index (1.4 percent away versus 2.0 percent); a new high would be a signal for a renewed rally in shares. With a larger weight in financial shares, the Russell is poised to outperform amid rising interest rates.

The Atlanta Fed upped its second quarter GDP growth forecast to 1.1 percent last week. Over the coming days, April wholesale and business inventories will be released, plus May retail sales.  Each of these reports could further lift the forecast. Retail has been weak in recent months, sales were flat in April, but economists are looking for growth of 1.4 percent in May. With the rest of the economy doing well, a pickup in consumption would signal a broad based economic acceleration is underway.

Data out of China was far less optimistic, where falling trade signals an ongoing slowdown in the world’s second largest economy. Nevertheless, Chinese stocks rallied to a new 52-week high on expectations the central bank may cut interest rates as soon as this week.

Lululemon (LULU), Sears Holdings (SHLD) and H&R Block (HRB) headline a light week for earnings reports.

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