The week opened with headlines out of China and Greece. The People’s Bank of China cut interest rates by 0.25 percent in order to combat a slowing Chinese economy, leading to a 3 percent rally in Shanghai. Speculators are looking for stocks to continue their steep ascent and real estate speculation is increasing. Emerging markets in general will benefit so long as this trend continues.
Tempering the rising optimism in China is the return of default fears in Greece. Members of the ruling party in Germany are openly talking of letting Greece leave the euro. According to a report out of Germany, the Troika (made up of the European Commission, European Central Bank and International Monetary Fund) has four plans for Greece, but only one of them is a positive scenario in which Greece reforms and pays its debts. Given that European banks would need a bailout if Greece defaulted, European leaders are likely to do as they’ve done for the past five years: give Greece more money. Despite the negative developments, this is why the euro was only down slightly in Monday trading.
In the United States, the major stock market indexes are all sitting just below their all-time highs. An upside breakout is possible this week, particularly for the S&P 500 Index which is only a few points off its high. Economic data is relatively light this week, but since indexes are so close to old highs, these reports could be the difference. April retail sales are out on Wednesday and analysts are forecasting a small increase of 0.1 percent. Friday brings industrial production, consumer sentiment and capacity utilization for April.
Although the bulk of earnings season has passed, some big names report this week. In technology, Cisco (CSCO) delivers earnings along with Applied Materials (AMAT) and Symantec (SYMC). Retailers start reporting in bulk this week, with Macy’s (M), Kohls (KSS), Nordstrom (JWN) and J.C. Penney (JCP) kicking things off. As with the broader market, SPDR Retail (XRT) is below its high, but a gain of about 3 percent would send it to a new record.
Interest rates and oil prices will be closely followed this week. West Texas Intermedia Crude is fighting to hold the $60 level as short-term technical indicators show the rally is running out of steam. That doesn’t mean a pullback is guaranteed, but the probability is elevated. More important for the broader market are long-term interest rates. The 10-year Treasury bond yield climbed above its 200-day moving average last week and at 2.20 percent, is now trading at its highest level since December. Interest rates on the 10-year have been falling since the end of 2013 and this downtrend is under threat of being broken. A push higher would be bearish for stocks over the coming days, while a pullback in interest rates could be all the stock market needs to hit new highs.