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Greek fireworks may come July 5

Weekly market comment
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of The Northwestern Mutual Wealth Management Company — Vail Valley

Be ready for fireworks July 5 — in Greece, anyway. After being at loggerheads for five months, the tussle between Greece’s government and its creditors has been turned over to a third party — the Greek people.

On July 5, Greeks will go to the polls to vote on the latest, and apparently final, proposal that would increase taxes and raise the retirement age. The referendum, effectively a vote on whether or not Greece will stay in the European Union, was announced in a televised speech by Prime Minister Alexis Tsipras on Saturday morning during which he called the troika’s offer an “ultimatum.” He added, “The goal of some of Greece’s partners is the humiliation of an entire nation.” Whether it was bravado or brinksmanship from Mr. Tsipras remains to be seen, but Greece’s creditors are refusing to revise their offer, which Germany’s Chancellor Merkel called “extremely generous,” and they also rejected the request from Mr. Tsipras for an extension on the €1.6 billion bundled payment due to the International Monetary Fund on Tuesday, so he could await the results of the referendum.

On Sunday, Mr. Tsipras, presumably irked by the latest moves, urged his fellow Greeks to say “a ‘big no’ to the ultimatum” on Friday, but the troika’s offer expires on Tuesday –—meaning the situation is, to put it mildly, fluid. In addition, since the European Central Bank will reportedly not provide Greek banks with any extra emergency liquidity, and with long lines at ATMs, he announced that Greece’s banks and stock exchange would be closed on Monday (the banks until July 6), while again decrying what he called the troika’s “blackmail.”



Thanks to Greece, stocks and bonds are likely to be in for another volatile run both here and abroad: last week, the major indexes all lost ground (despite the fact that the Nasdaq twice hit a new high), and, after two weeks of declines, the yield on the 10-year Treasury hit its highest level since September.

The trade pact lives…



Thanks to the GOP and the president winning over a handful of Democrats, the Trans-Pacific Trade Pact is very much alive. The measure, now passed by the Senate and House, will give the president (and his successor) the power to “fast track” trade bills for the next six years. This means any bill will be subject to a straight up-and-down vote without amendments or filibusters. After the bill’s passage, Senate Majority Leader Mitch McConnell (R, Kentucky) said, “This is a very important day for our country,” adding, “America is back in the trade business.”

…As does the ACA, for now

The Supreme Court upheld the constitutionality of the Affordable Care Act for the second time in three years, this time by a 6-3 margin. President Obama said the law is “here to stay,” but House Minority Leader John Boehner (R, Ohio) pledged to continue the fight to overturn it.



Volatility in China

With investors concerned about what The Wall Street Journal called a “yearlong debt-filled rally,” China’s two main stock indexes tumbled more than 7 percent on Friday. On Saturday, the central bank responded by lowering its benchmark interest rates and reducing the amount of money that some banks have to hold. There was still more disappointing news on Sunday when the Chinese government reported that industrial profits were up only 0.6 percent in May, compared to a gain of 2.6 percent in April.

Not as bad

The first quarter was bad but not as bad as first thought, with the government’s final revision coming in at -0.2 percent compared to the original estimate of 0.2 percent, followed by -0.7 percent. The change was mainly because exports decreased less than previously estimated, while consumer spending and residential investment were revised upward. Estimates for the second quarter, which ends tomorrow, range from 2 to 3 percent.

In other economic news, the National Association of Realtors said existing home sales were up 5.1 percent in May to a seasonally adjusted annual rate of 5.35 million, and sales are headed for their best year since 2007. Plus, the Commerce Department reported that new home sales increased 2.2 percent to a seasonally adjusted annual rate of 546,000, the fastest pace since February 2008. The Commerce Department also said that consumer spending jumped 0.9 percent in May from 0.1 percent in April, the biggest gain since August 2009, and a sign that jobs and cheap gas are finally opening wallets. Personal income rose 0.5 percent, and after-tax savings fell from 5.4 percent to 5.1 percent. The Labor Department announced that first-time jobless claims rose 3,000 to 271,000, still near the 15-year low of 262,000 in April; the four-week moving average was down 3,250 to 273,750. Capital goods orders, excluding aircraft, increased 0.4 percent in May, according to the government, while durable goods orders were off 1.8 percent; durable goods orders less transportation rose 0.5 percent. The University of Michigan’s Consumer Confidence Index climbed to 96.1 from 90.7 in May, the highest reading since January’s 98.1 and well up from 82.5 a year ago. Over the first six months of the year, confidence rose at its fastest pace since 2004. Lastly, there was a glimmer of hope in the eurozone as Markit reported that its composite index of factory and services activities hit its highest level in more than four years, up to 54.1 in May from 53.6 the month before.

A look ahead

It takes a lot to push the Labor Department’s monthly unemployment report to the back pages, but that may well happen this week as Greece hogs the headlines. In addition to the jobs report, due Friday, there will be updates on pending home sales, the S&P/Case Shiller Home Price Index, construction spending, manufacturing, vehicle sales and factory orders. 

Have a safe and happy Independence Day!

This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company®.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

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The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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