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Um…the correction is still correcting

It’s around this time that I reminisce for that overhead message to return to my seat and buckle up as we’re encountering turbulence. Headlines last week were controlled by disappointing unemployment data matched together with all of the major U.S. equity indexes posting losses for a second consecutive week. The S&P 500 recorded its first back to back losing weeks in 2012. With-2% on the week and -1% the week before, bringing the indexes second quarter performance to -3% thus far. Elsewhere, the pullback ranged from -1.6% on the Dow to -2.7% on the Russell 2000. All nine of the major S&P sectors experienced a taste of the pullback, ranging from -1% for the materials and consumer discretionary, to more than -2.5% for the financials, energy, and health care.

First quarter earnings season did however began with a handful of reasonably good reports. Overall the data was not recessionary and showed continuing domestic and global demand but concerns about Spanish debt and a softening Chinese economy sent financial markets into risk aversion mode. The fallout from Spain will invariably be felt in U.S. equities as confirmed by Friday's outsized sell-off.

The Spanish situation became conclusively worse last Friday, and next Thursday's Spanish bond auction could spell particular trouble for U.S. equities. Why you wonder? Well, the cost to insure Spanish debt hit an all-time high Friday as yields on the country's10-year note jumped 18 basis points to nearly 6%. Considering that the value of Spanish credit default swaps is 5 times that of Greece ($15 billion compared to $3 billion) meaning that in the event of a Spanish default, all bets are off. This may not end nice. Curiously, I realize that I apparently don’t have an ‘emergency bag’ anywhere near my desk,you know, just in case.

I do remain optimistic even with all the ‘economic tornadoes’ swirling about. It’s not all Doom and Gloom - there are gems hidden among the rubbish. U.S. Treasury bond yields fell for a fourth consecutive week. The 10 year note is under 2%, the 5 year at 0.85%, the30 year bond at 3.15%. Corporate and municipal bond yields also fell, while inflation protected bonds got on the party train. The week ended with most of the major currencies off against the Dollar as Fridays risk aversion allowed the greenback to be the main beneficiary. Divided paying Blue Chips stocks continue to report and we will also get housing and manufacturing data. It ensures to be an significant week.
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