Weekly Market Wrap Up, July 18-22, 2011

Caterpillar Falls Short of Estimates; European Leaders Agree To A Second Bailout Package For Greece

U.S. stocks on Friday interrupted a global stock rally as the market impact of Caterpillar’s disappointing quarterly results outweighed the euro zone’s agreement to a second bailout package for Greece. The DJIA and S&P500 started the day in negative territory with the Nasdaq making small gains. Towards the afternoon the DJIA remained lower for the day while the S&P paired its morning losses by adding 1.3 points for a 0.1% gain; the Nasdaq continued its rise with a 0.8% gain. The Dow, SPX, and COMP all maintained a 2% gain for the week. Caterpillar Inc. was the main factor in Friday’s trading as the construction equipment company reported a 44% increase in second-quarter earnings but failed to meet analyst expectations; Caterpillar fell 8% in Friday’s early trading. U.S. Treasurys rose as yields were sent lower; the 10-year treasury note yield fell to 2.9735%. The EUR/USD rose to 1.437 and the USD/JPY fell to 78.283. On Monday the price of gold reached a record $1,600 an ounce while retreating to the $1,580 to $1,600 range throughout the week; on Friday gold once again surpassed $1,600 an ounce. The CBOE Market Volatility Index (VIX) was down 12% for the week.

Leaders in Europe gathered for a summit representing 17 nations that consist of the euro zone on Thursday, which resulted in an agreement to issue a second rescue package of government money for debt-laden Greece. Government leaders in the summit also “widened the scope” of their bailout fund in order to allow the fund to buy the bonds of nations with debt troubles as well as offer credit lines and support for banks during a time in need. Under this second round of rescue measures, banks and insurers will “voluntarily” exchange their Greek bond holdings for lower rates and longer maturities in an overall effort to lend assistance to the Mediterranean nation. This bailout is an addition to the original rescue plan issued by the European Union and the International Monetary Fund in May of last year (€110 billion). Despite the progress made by European leadership on this front, Fitch Ratings came out with a statement saying that Greece faced “restricted default”, particularly due to the rescue plan’s involvement of the private sector. “The proposed debt exchange implies a 20% net present value loss for banks and other holders of Greek debt.” Fitch went on to say “An exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress constitutes a default event. “Despite Fitch’s statements, Thursday’s agreement sent Greek bond prices surging with the Greek two-year debt yield falling 27.6%, north of 600 basis points.

Article submitted by:  Shaun Hoyes of the Capital Markets Lab (CML). To learn more about the Capital Markets Lab please visit https://business.fiu.edu/capital-markets-lab/.

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The Capital Markets Lab (CML) provides students, faculty, and the South Florida community with unparalleled educational and technological resources relating to finance. By utilizing the most current financial research platforms available, students are given an opportunity to supplement academic theory with the real world analytical tools used by leading financial institutions. Visit us at http://business.fiu.edu/capital-markets-lab/.

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