From the August 01, 2011 issue of Futures Magazine • Subscribe!

Are stock indexes experiencing Déjà vu?

Markets

The three Es

Analysts say economic news, earnings and employment will move stock indexes for the rest of the year.

While a lot of focus in the first part of the year was on the sovereign debt crisis gripping the Eurozone, with special emphasis on Greece, a slowing of economic growth in China largely went unnoticed. Chris Mayer, managing editor for Agora Financial, says this latest slowing could have a significant impact on commodities and the rest of the market. "A lot of people haven’t really noticed, but China’s Purchasing Mangers' Index (PMI), which measures manufacturing activity, fell for the third straight month in June. China has had a huge impact on the whole commodity story and most commodities were down in the second quarter" (see "As goes China…").

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This is a recent trend change as China has been a major buyer of commodities. "Demand from China has been strong across the commodity spectrum. China has been buying up all kinds of raw goods to feed its economic expansion. Name the commodity and chances are that it has increased in price significantly and one of the major reasons probably is China," Larson says.

Mayer says this easily could translate into a slowdown in some stocks. "We would see a continued underperformance from stocks involved in extracting commodities. The most sensitive would be in areas like steel and copper; less affected would be stocks around oil. If China contracts, oil probably will fall too, but it’s less vulnerable than a lot of the metals and steel stocks," he says.

In addition to economic news coming from around the globe, debt problems here in the United States bear watching. "We’re not in the same situation as Greece, our debt-to-GDP is much more tame, but we do have a large federal deficit that is approaching 10% of GDP. That gap is going to have to be closed at some point in the future because it isn’t sustainable," Larson says.

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