Lack of Monetary Stimulus Disappointing? There’ll Be More…When the Eurozone Crisis Worsens

Eurozone Crisis WorsensWe have a week remaining in June, and so far, the month has turned in better stock market results after a disastrous May. The key stock indices are over three percent this month but remain negative since the end of the blistering first quarter. The NASDAQ, S&P 500, and Russell 2000 joined the Dow Jones Industrials in rallying back above their respective 50-day moving averages (MA).

The near-term technical picture is neutral to moderately bullish given the break of the 50-day MA on above-average relative strength, but there could be some near-term selling pressure, given the overbought technical condition and the failure to hold gains, based on my market view.

As has been the case in the recent months, my market view is that any upside gains may not be sustainable. Trading continues to be news-driven, and there are plenty of unknowns in Europe, China, and the U.S, according to my market view.

Greece managed to elect a coalition government to accept the austerity measures, but the country is clearly seeking some leeway on the measures. I don’t think Germany is amused.

Spain has surging bond yields. The country’s 10-year bond yield is over seven percent. In my market view, this is a red flag and a dire situation if the Spanish banking system does not get help. Over $130 billion is required as an infusion into the system, but then this is only a bandage solution, according to my market view, as I believe there are major structural issues in not only Spain but Europe as well. Italian yields are also at over six percent as the country fights its debt load. Germany, the largest and most significant member of the 17-country eurozone, just reported a disappointing Purchasing Managers Index (PMI), a sign of weak manufacturing.

The Market Eurozone Manufacturing Producer Price Index (PPI) was a horrible 45.1 in May. Spain and Britain are in a second recession, and the eurozone could also jump, in my market view.

The eurozone risk remains a major variable that will take time to resolve. My market view is that there’s still a sense of uneasiness given the lack of a valid blueprint to fix the eurozone debt issues.

The dire growth in the eurozone is impacting global economies, including China, the PMI of which is also weak. China could see its 2012 gross domestic product (GDP) fall below eight percent should the situation fail to improve in Europe and elsewhere.

Yet the risk is not confined to outside America’s borders. Economic growth, while improving, continues to be somewhat stagnant. Jobs growth is weak, as I recently discussed in “Jobs Market: New Hyundai Plant Opening Shows Just How Bad Situation Is.”

The failure of the Federal Reserve to offer QE3 at its FOMC meeting on Wednesday was disappointing. Instead, the Fed will work through the bond market to lower long-term borrowing rates. The $400-billion “Operation Twist” will be extended by another $267 billion by the end of 2012. This strategy involves the Fed buying more long-term bonds and selling short-term bonds, effectively lowering long-term rates. The market wanted to see additional monetary stimulus, which it didn’t get; but it could very well see it if the eurozone impact worsens.

In my market view, this is a time to be careful. Look at taking some positions off the table on strong upside moves in stocks.