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Price correction? Not so far

February 13, 2013

It will be politics that dominate the news flow this week, except in the case of China. Markets there are closed for the week-long Lunar New Year celebration, leaving a void of fundamental data, and creating distortions that will last for weeks.
-David Joy, chief market strategist, Ameriprise


The S&P 500 rose last week for the sixth straight time, and although the 0.3 percent increase was the slowest of the year, the gain extended the market's streak of having risen every week of the new year. That it was able to rise at all was a notable achievement against a backdrop of rising political uncertainty, and widespread expectation of at least a modest price correction after the strong start to the year. Friday's close left the index at its highest level since late 2007, and a new recovery high.

It will be politics that dominate the news flow this week, except in the case of China. Markets there are closed for the week-long Lunar New Year celebration, leaving a void of fundamental data, and creating distortions that will last for weeks.

In Europe, domestic political uncertainty in Italy and Spain has raised investor anxiety levels, and caused markets to pull back. In Italy, the polls have tightened in the national election that is just two weeks away, creating uncertainty over the makeup of the new government and its commitment to fiscal and structural reform. The yield on its ten-year note rose 22 basis points last week to 4.54 percent, its highest since mid-December. In midday trading this Monday, the yield had climbed further to 4.60 percent. Stocks have dropped in each of the past two weeks for a cumulative decline of 6.2 percent. In Spain, accusations of corruption within the ruling party have resulted in a climb in sovereign ten-year note yields of 16 basis points last week, to 5.34 percent, up sharply from the mid-January low of 4.86 percent. Similar to Italy, the yield climbed another six basis points by midday Monday. And similarly, stocks have also declined for the past two weeks, falling 6.3 percent. The re-emergence of political risk has caused Eurozone-wide equity averages to drop and trim their gains year-to-date. The Euro Stoxx 50 index has fallen 4.2 percent in the past two weeks. On Thursday, the Eurozone forth quarter GDP report is expected to show a contraction of 0.4 percent, its third straight decline.

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