Market Commentary: The risks in Europe are enormous and the global “flight-to-quality” movement of capital fleeing that part of the world continues to strongly support demand for U.S. dollar denominated assets like Treasury debt obligations and agency eligible mortgage-backed securities. This market condition is good news for the prospects for steady to perhaps fractionally lower mortgage interest rates.
Credit market participants appear reasonably comfortable with the idea that French voters will elect a new president in Sunday’s run-off election, but fear a chaotic parliamentary election the same day in Greece.
The Greek election has a lot of room for upset. Market participants are worried that a slim majority by Greece’s pro-bailout coalition could make it difficult, if not impossible for the country to implement the financial reforms promised to its international lenders. Without compliance, Greece will not be eligible to receive additional financial support, threatening its membership in the euro.
As Matthew Tuttle, chief investment officer of Tuttle Wealth Management LCC pointed out in comments made to a columnist from MarketWatch last Friday – today’s anemic nonfarm payroll report has “thrown cold water on the idea that we can decouple from Europe’s problems. We are not in a recession … but we aren’t strong enough to justify a lot of (economic) upside here” without higher levels of demand from our global trading partners.
Decelerating economic growth here at home leaves open the likelihood that before the year is out the Fed will be compelled to roll out another fiscal stimulus program in the form of QE3. As long as this potential exists – the vast majority of investors will be hesitant to sell the debt obligations they currently hold in their portfolios -- which in-turn provides at least near-term support for the prospects of steady to perhaps fractionally lower mortgage interest rates.
