Europe worries continue to depress stocks

Stocks prices remained under pressure amid new concerns that March’s Greek bailout deal may yet unravel and growing worries about Spain. The Dow and the S&P 500 both fell about 0.7% today while the NASDAQ slid 0.4%. European stocks were mostly lower, although several exchanges began to turn upward near the end of the trading day, and the German DAX index managed to close in positive territory, gaining 0.5%. But Spanish stocks in the IBEX 35 dropped 2.8% to 6,812.70, its lowest level in more than eight years, and the 10-year Spanish sovereign bond yield went over 6%, roughly 450 basis points above record low yields on German bunds.

Stocks got a slight boost in the afternoon after it was reported that the European Financial Stability Facility’s board said it would release €4.2 billion in financing for Greece as part of the bailout agreement. However, the board is holding back another €1 billion that will be paid out by June, indicating concern that the bailout deal might come undone and pressure on any emergent Greek government. At the same time, the party that had the most votes in the country’s parliamentary elections on Sunday failed to put together a coalition government, and other pretenders to the top Greek office talked of repudiation or renegotiation.

Nervous investors continued to pour money into German bunds despite the lowest interest rates on record. The 30-year bund gained another 4/10ths of a point Wednesday, reducing the yield to 2.24%, while the 10-year gained about ¼ point to yield 1.52%. U.S. Treasury bond prices were largely unchanged on the day, although TIPS prices fell today. The euro fell (for an eighth day) about 0.5% to about $1.2939 late, its lowest level since January 20. Oil prices also continued to fall, with Nymex crude futures dropping another 0.6% to $96.46 a barrel. The price has now dropped more than $10 a barrel since the beginning of May and is off about $15 since the early March peak.

In what may be a sign that the U.S. housing market has finally hit bottom, Fannie Mae turned a profit in the first quarter and said it wouldn’t need additional government aid at the moment. The company, which has so far drawn down more than $117 billion in federal aid since being seized by the government in September 2008, said it earned $2.7 billion in the first quarter, compared to a  $6.5 billion loss in the year-ago quarter and $2.4 billion in the fourth quarter of 2011. Credit-related expenses decreased by nearly two-thirds, Fannie said, adding that it expects its total loss reserves peaked at the end of 2011. Last week, Freddie Mac, the other big government-controlled mortgage buyer, reported net income of $577 million in the first quarter and said it would need to draw down only $19 million from Treasury; it has drawn down $72 billion since 2008.

Of course, while the bottom may have been reached in the housing market, there’s no assurance that housing activity will show any real vigor anytime soon. However, the National Association of Realtors said Wednesday that median prices of existing single-family homes rose in 74 out of 146 metropolitan statistical areas in the first quarter compared to the year earlier quarter, compared to 72 areas where prices fell. By comparison, only 29 metro areas had price increases in Q4 2011.

Reports/dates/facts/links worth paying attention to over the next week:

  1. May 10: Weekly unemployment claims.
  2. May 11: Producer price index for April; University of Michigan consumer sentiment for May.

Copyright © 2012 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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