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Lazard Frères Gestion: Market reactions to new Italian Government

After a positive reaction following the agreement on a government between the League, the Five Stars Movement and the president, the market has started to take into account the lack of fiscal space of Italy with spreads rising again. It looks like there will not be any leniency from bond investors. The reaction of rating agencies will be important to watch.

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Up and Down Wall Street

Stocks can go up, down or sideways. Investors have seen Wall Street undergo a correction in February and since then the market has recovered somewhat without succeeding in reaching new highs.

With some ups and downs, stock prices seem to be consolidating and have created a channel that is apparently trending upwards after a positive earnings season. Resistance is at 2780, and support is at 2580. More recently stocks have been moving between 2740 and 2700, staying just above the 100 dma.

It is unlikely that this narrow corridor will last much longer, that is, continue going sideways. One reason why a downwards trend may satisfy the bears is that bonds have become more interesting of late with ten-year Treasuries continually testing the 3% barrier. If the Fed ups interest rates another 25 bps at the June FOMC meeting, it will slowly dawn on more and more investors that holding stocks that pay no dividends and are probably not going to enjoy share price increases is not the best way to employ their capital.

Even two-year Treasuries are yielding 2.5%. When short-term yields approach or surpass long-term yields, that is usually a sign that a recession is on the way.
Amazon has had a spectacular run since the Great Recession and is now priced at a heady $1,641.00. Given the fact that the present recovery has had an extremely long life and bond yields are creeping up fast, it could be a good move to take profits and hold cash in order to be able to shift to fixed-income when the long-awaited downtrend takes hold. Lance Roberts holds the view that there is only a 20% chance of the market breaking out upwards and reaching a new high in the short term.

In the case of Apple, the situation is different in that management has communicated its intention of implementing a huge share buyback programme that will most probably push the stock price higher. $100 billion spent on share buybacks is going to make a difference. It therefore makes sense to hold on to Apple until after the share price increases. There is also another difference between Apple and Amazon. Apple pays dividends while Amazon does not.
What is disturbing about the market is that the capitalization of FAANGs is so great that market indexing depends to a great extent on only these few stocks. This increases the risk of a market downturn as so many passive funds are based on very few stocks. Computers only do what they are told to do.


Walter Snyder - WWS Swiss Financial Consulting SA

Weak core price pressures persist

Inflation continues to hover at low levels in the Eurozone. Last month, core CPI inflation stood at only 0.7% YoY, certainly disappointing news for the ECB.

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