This is Sheraz Mian filling in for Steve Reitmeister while he's on vacation.
Noisy protests in Athens against the Greek government's tough austerity measures and a rating agency's negative report on Portuguese banks brought Europe’s debt problems front and center once again. And having experienced this far too many times in the past year, we know how it plays out in the markets. The safe-haven trade strengthens the greenback, largely at the expense of the common currency. Yields on treasury bonds and the prices of dollar-denominated commodities come down.
Oil, the numero uno dollar-denominated commodity, had an even more direct reason to fall. A bearish government report showed rising inventories and soft demand, a sign that $4 gasoline may already be eating into demand in an otherwise seasonally high-demand environment.
With last week's rout in the commodity complex still fresh in investors' minds, oil's pullback reignited fears about the economy's growth momentum. If oil demand was falling at the outset of the summer driving season, the thinking went, then it could be a sign that the consumer was tapped out. This meant that the first quarter softness in the economy may not have been 'transitory' after all and likely carried into the current quarter as well.
The market overcame this fear last week only after the solid April non-farm payroll report on Friday. But with the next iteration of that report almost a month away, it is reasonable to expect that these fears will linger for some time.
It doesn't take much to change market sentiment. And change it will, for the better. Let's hope that the positive reversal takes place sooner rather than later.
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