Last week, the S&P 500 logged its third straight weekly decline, and stocks plunged Monday on European debt worries, but I believe this is merely a “pause that refreshes” before the next earnings reporting season begins in July. There is good reason to believe that second-quarter corporate earnings will continue delivering positive surprises, but the big news last week reads more like a gossip column, involving dissension at the International Monetary Fund (IMF) and the Fed.
Despite the fact that former IMF Director Dominique Strauss-Kahn dominated the gossip pages last week, his sudden departure from the IMF seemed to undermine the euro a bit, since the IMF was in the midst of drafting a controversial plan to help Greece restructure its debt. Soaring yields on Greek debt have been crippling that nation from paying down its original European Union/IMF loan. Last Friday, Fitch Ratings downgraded Greece three notches to B+, meaning that Greek bonds have gone from junk to smelly junk!
Meanwhile, the Federal Reserve Board is fighting an ongoing civil war between its hawks and doves. On Wednesday, the minutes of the last Federal Open Market Committee (FOMC) meeting revealed that the FOMC is now composed of five “doves” (whom President Obama named to the Fed). These doves do not want interest rates to rise as long as unemployment remains high. On the other side, five hawks advocate raising rates fairly soon. In effect, the “independent” Fed has been invaded by White House doves! When traders realize that the Fed is becoming a political pawn, I expect that the U.S. dollar will resume its decline. Read