A Note Before we Begin:

The market feels like it wants to move lower. Volatility in the market has increased. The ‘tone’ of the market has turned negative. How is volatility measured? Read here: The Vix Index… not a Female Fox but Wily Nonetheless

What Happened this Week?

Let’s break this down by region. All performance is as of Friday May 11th.

The United States: A Bright Spot

The S&P was down 1.15% on the week. Year to date it is up 7.62%

In the U.S. the data would suggest better news than stock market performance this week. Jobless claims fell and confidence rose to the highest level we have seen since January of 2008.

Another interesting thing, inflation expectations have fallen. They are now at their lowest rates since 2010. During times like these—when few people think inflation will rise—ask yourself, do I? There are investments you can buy which historically have performed better during times of rising inflation.

For more read NYT: Building a Portfolio that will Stay Afloat when Inflation Returns.

China: A Slow-Down Takes Hold

The Shanghai Index was down 2.7% on the week. Year to date, it’s still up 8.5%– outpacing Europe and the U.S.

Part of the reason why U.S. expectations for inflation fell are partially because inflation has been under pressure (moving lower) in China as well. Chinese Inflation fell to 3.4% year over year.

If Chinese inflation is falling, the costs of their goods and services are falling. Given how much the U.S. and the rest of the world imports from China, this may mean slightly lower prices for imported goods. Which lowers inflation for everyone they export to.

The signs of a Chinese slowdown though, are upon us. Most all data released out of China this past week was weaker than the market expected it to be. This, combined with lower inflation, opens the door for the Chinese central bank to continue easing policy rates– which stimulates the economy.

Europe: “You Can’t Always Get What You Want”

The Euro Stoxx 50 was up 0.2% on the week.  Year to date it’s down 2.7%

It’s not getting better. But is it going to be as bad as last summer when we saw European and U.S. deficit woes take stocks down by almost 20%? Maybe not—because Europe has a new head of their central bank, Draghi, who appears to be more proactive about providing monetary relief when things get shaky.

And, for sure, they are getting a bit shaky. Greek stocks fell to their lowest levels since 1992, down 11% on the week. It is looking like a Greek exist from the Euro may become a real possibility. As such, the Euro is under pressure.

Spanish bond yields are rising again, indicating people are nervous about their ability to repay bondholders.

Watch news from European banks very carefully here. If it is felt they are under stress, the reaction to Europe’s issues will get much worse. If banks are able to stay supported and well capitalized the impact will be lessened.

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