Weekly Market Update: Insights from TIAA-CREF Experts

Markets Remain Focused on Europe’s Sovereign Debt

Ed Grzybowski, Chief Investment Officer

Financial markets continue to fixate on Europe, where governments are struggling to resolve the sovereign debt crisis in Greece and prevent a contagion effect that could spread throughout the Eurozone. Europe’s already-weak banking sector was shaken this week when two of France’s three largest banks, Credit Agricole SA and Societe Generale SA, had their long-term credit ratings downgraded one notch by Moody’s because of concerns about the banks’ Greek investments. Further worsening of conditions for European banks could potentially send the region’s anemic economy into recession.

A recession in Europe would also damp growth prospects in the U.S., where the economic recovery remains fragile and vulnerable to potential shocks. In August, zero job growth and flat retail sales offered more evidence of the stagnant state of the U.S. economy, underscoring the need for some form of stimulus that consumers and businesses have been unable or unwilling to provide. The jobs plan announced by President Obama last week was larger in scope than many had anticipated, and a number of economists agree that the measures, if enacted, could make a significant contribution to employment and GDP growth in the near term.

Despite ongoing uncertainty about developments in Europe and the U.S., the equity markets have shown some resilience and appear to have successfully tested recent lows. By mid-week the broad U.S. equity market indices had managed to string together three consecutive days of hard-fought gains. Often these advances were accompanied by heavy intraday volatility, with the markets tending to trade based on daily or even hourly news flow, rather than long-term fundamentals.

If Europe is able to avoid a recession in 2012, then U.S. stocks could rebound from their current low valuations. A recovery in beaten-down European equities seems increasingly contingent on whether farther-reaching, comprehensive efforts to contain the Greek debt contagion materialize. Markets hoping for a stronger response to the crisis from key European leaders were heartened by this week’s meeting of Greek Prime Minister George Papandreou, German Chancellor Angela Merkel, and French President Nicolas Sarkozy, who announced that Greece will remain in the euro bloc and is committed to meeting its fiscal targets.

In fixed-income markets, companies are taking advantage of low interest rates. With the 10-year U.S. Treasury yield at or just below 2% and the 30-year hovering around 3.3%, we are seeing significant investment-grade corporate issuance this week. Investor demand for corporate debt is strong, as company balance sheets are in good shape, and these issues often offer a high-quality alternative to government debt. Riskier fixed-income securities, such as high yield and commercial mortgage-backed securities, have underperformed but could potentially see some improvement if perceived progress in addressing Europe’s sovereign debt problems helps slow the recent flight to quality.

The information provided herein is as of September 16, 2011.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.



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