Week in Review: Investors tense ahead of Greek debt agreement

For the week ended February 17, 2012 and the week ahead.

• Greek bailout hopes rise
• Moody's cuts ratings for six European countries, puts banks on review
• Bank of Japan moves to stimulate economy
• Eurozone economy shrinks slightly in fourth quarter
• GM posts record earnings

Global equities markets were flat this week after investors endured days of uncertainty, resulting from European policymakers' inability to cement an agreement on a Greek bailout and restructuring package.

Adding to the tension, Moody’s cut its debt ratings for six European countries, including Spain and Italy. The credit rating agency also placed numerous large banks in Europe and North America on review.

In the United States upbeat data assuaged some fears. After dipping sharply on Wednesday, the Dow Jones Industrial Average traded near a four-year high Thursday. U.S. weekly unemployment claims fell to a four-year low, housing activity rose, and inflation gauges showed modest rises.

The U.S. Congress extended the U.S. payroll tax deal through the end of 2012, taking it off the table as an election campaign issue, and continuing a mild but steady form of economic stimulus for 160 million American workers.

U.S. and global economic news

Greek bailout hopes rise - Drama rose surrounding the highly anticipated €130 billion bailout of Greece, which would allow it to make its March 20 bond redemption obligation of €14.5 billion among other payments. As the clock ticked, the Greek government approved austerity measures necessary for fellow eurozone member countries to sign off on a bailout package. The eurozone finance ministers initially hesitated to agree to the package as they felt the austerity measures didn’t go far enough. However, recent reports indicate they will likely approve the package on Monday. The bailout will require contributions from the International Monetary Fund, European Central Bank and European Union.

Moody’s cuts ratings for Italy, Spain and other countries - Moody’s Investors Service cut the credit ratings for six European countries: Italy, Spain, Portugal, Slovakia, Slovenia, and Malta. Spain was downgraded to A3 from A1, Italy to A3 from A2, and Portugal to Ba3 from Ba2, all with a negative outlook. The ratings agency also revised its outlook for the United Kingdom, France, and Austria to negative. However, all three countries kept their Aaa ratings.

Bank of Japan moves to stimulate economy- The Bank of Japan made a surprising move to stimulate the Japanese economy and battle deflation by expanding its asset purchase program. The BOJ added ¥10 trillion ($128 billion) to an asset-purchase program and set an inflation target to counter its stagnant, deflationary economy, which shrank 2.3% last quarter. The yen is expected to weaken as a result of this action, helping Japanese exporters.

U.S. weekly jobless claims fall; four-week average at four-year low - Initial jobless claims by U.S. workers decreased by 13,000 to 348,000 for the week ended February 11, the fewest since March 2008, according to the U.S. Department of Labor. The four-week low fell to 365,250. The number of continuing unemployment benefit claims drawn by workers for more than a week fell by 100,000 to 3,426,000 in the week ended February 4, the lowest since August 2008.

Eurozone economy contracts 0.3% - The eurozone economy shrank in the fourth quarter, but gross domestic product decreased by a slim 0.3%, less than had been expected. Germany’s economy, which makes up one-fifth of the eurozone’s economic output, fell 0.2% during the quarter, while France’s economy unexpectedly grew. German business sentiment improved in January and German investor confidence rose to a 10-month high in February.

U.S. inflation tame according to two key measures - U.S. inflation remains quite tame based on both the wholesale producer price index and the Consumer Price Index. The CPI  rose just 0.2% in January from December and 2.9% over the past year. The core CPI, excluding energy and food items, climbed 0.2% for the month and 2.3% on the year. The producer price index rose a seasonally adjusted 0.1% in January from December, and was 4.1% higher than a year ago. Excluding volatile energy and food costs, the wholesale gauge was up 0.4% on the month and 3.0% year over year.

U.S. housing starts rise; warm weather a possible factor - Home construction increased 1.5% in January, a possible sign of recovery in the fragile U.S. housing market, the U.S. Department of Commerce reported. The seasonally adjusted annual rate of 699,000 housing starts compared well to the previous three years’ numbers––609,000 in 2011, 587,000 in 2010, and 554,000 in 2009. However, the fourth-warmest January on record might have helped.

Mortgage delinquencies at three-year low - In another positive sign for the U.S. housing market, 7.6% of residential mortgages were at least 30 days past due on their payments at the end of 2011, down from 8.3% a year earlier, and a drop from a peak of 10% early in 2010.

U.S. economic indicators up for fourth straight month - The Conference Board’s index of U.S. leading indicators rose 0.4% in January, just shy of the 0.5% anticipated by economists surveyed by Bloomberg News. It was the fourth consecutive month of gains. Seven of the 10 indicators in the leading index rose.

U.S. and global corporate news

General Motors posts record profit despite stalling in Europe - General Motors posted its best year of profits ever, with net earnings of $7.6 billion in 2011 on strong North American sales, higher vehicle prices, and steady growth in China. Annual earnings in North America were $7.2 billion, up from $5.7 billion in 2010, and fourth-quarter results were much improved, at $1.5 billion in profits up from $813 million a year earlier. However, European results held GM back, with a $562 million fourth-quarter loss and $747 million for the year in the struggling region.

Moody’s places big banks on review - Moody’s Investors Service has placed Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, Deutsche Bank, JPMorgan Chase and more than 100 other financial institutions, including many in Europe, on review for possible downgrade. Moody’s indicated some firms might have their credit ratings dropped by as much as three levels. The ratings agency said new economic and regulatory restrictions could limit the banks’ future growth prospects.

AMR posts billion-dollar quarterly loss - AMR, the parent of American Airlines, announced a fourth-quarter loss of $1.1 billion, compared with a quarterly loss of $97 million a year earlier. For the year 2011, AMR lost $1.98 billion, its fourth consecutive annual loss. In contrast, United Continental Holdings and Delta Air Lines posted annual profits of $864 million and $854 million, respectively.

BNP Paribas, AXA take hit from Greek debt write-downs - French bank BNP Paribas reported a sharp drop in its fourth-quarter profit, which fell  51% from a year earlier, largely on a €567 million write-down on Greek sovereign bonds and another €148 million charge to protect its balance sheet from the impact of the European debt crisis. The bank's  revenue fell 6.1%. French insurer AXA also took a large write-down —€387 million––on Greek bond exposure in 2011. Its full-year revenue fell 4%.  AXA seemingly had a good year, posting a 57% jump in profits, but that relative gain was largely a result of its year-earlier result being affected by a €1.6 billion loss on the sale of part of its U.K. life insurance business.

Deere profit rises 3.7% - Deere & Company’s earnings rose 3.7% in its fiscal first quarter as the world’s largest farm equipment manufacturer benefited from strong global demand. The company’s revenue rose 11%. Sales rose 22% outside of North America and 22% in Deere’s smaller construction and forestry-equipment segment.

The week ahead

• Wal-Mart and Dell announce their earnings on Tuesday, February 21.
• Hewlett-Packard announces its earnings on Wednesday, February 22.
• The National Association of Realtors releases monthly existing home sales data on Wednesday, February 22.
• Germany and the U.K. release their GDP data on Friday, February 24.
• The University of Michigan Consumer Sentiment Index is released on Friday, February 24.

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