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Week Ended August 10, 2012

Stocks reach three-month highs in response to hopes for Europe { These markets, on wall street and globally, are total fraud and b***s***! }

The major indexes closed higher for the week as continued hopes for central bank actions to spur the global economy boosted sentiment. The S&P 500 Index climbed above 1,400 for the first time in three months. Investors appeared to grow more hopeful about a resolution to the European debt crisis, in particular, following comments last week from the head of the European Central Bank, Mario Draghi. Draghi announced that the ECB would consider buying short-term debt from Spain and Italy if they sought bailout funds.

Plan buys time but longer-term solution still needed

Ken Orchard, a sovereign credit analyst based in T. Rowe Price's London office, believes the new ECB plan is a significant positive for the periphery and should lead to a general reduction in risk and lower relative yields on Spanish and Italian government bonds. Nevertheless, he warns, the plan does not solve the underlying causes of the eurozone crisis. The ECB cannot solve the competitiveness imbalances, fiscal deficits, and excessive debt levels that make the crisis so pervasive. The eurozone's future will be uncertain until those problems are sufficiently resolved.

Second-quarter earnings generally strong

With European worries diminishing somewhat, U.S. investors were able to turn back to reports of second-quarter earnings. The Wall Street Journal reported Tuesday that, to date, nearly two-thirds of the companies listed on the S&P 500 have managed to beat earnings estimates for the latest quarter. Before the start of reporting season, many investors had braced themselves for a decline in profits due to waning exports and diminishing returns from cost-cutting measures.

In fact, the government reported this week that productivity—a measure of output per hours worked—had rebounded a bit in the second quarter. Nevertheless, T. Rowe Price economists note that productivity gains are likely to be muted in the second half of the year and remain well below their average pace during the past decade.

Better U.S. labor market and a stabilizing housing market might result in less Fed stimulus

The Labor Department reported a drop in weekly jobless claims on Thursday, providing further evidence that the springtime slowdown in the labor market was temporary. When combined with the stabilizing housing market, the improving jobs picture is likely to delay any further major stimulus measures from the Federal Reserve. While recent stock gains may have been driven in part by hopes for further Fed action, T. Rowe Price economists noted that policy stimulus is more likely to come from China and Europe. Indeed, stocks lost some momentum late in the week following a report that Chinese exports—many of which are destined for Europe—had slowed sharply.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13207.95	111.78	8.11%
S&P 500	1405.87	14.88	11.79%
NASDAQ Composite	3020.86	52.96	15.96%
S&P MidCap 400	961.66	17.62	9.35%
Russell 2000	801.28	12.85	8.17%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

¹Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

²The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.

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U.S. Bond Market

Week Ended August 10, 2012

Treasury bonds weaken as investors show an appetite for risk

Investor demand for Treasuries was soft during the week, pushing longer-term yields to their highest levels in weeks. Investors were encouraged by rhetoric from Europe that indicated more willingness to support financial relief measures. The possibility of Italy and Spain entering official support programs could create opportunities in corporate bonds in those markets. Corporate yields there are attractive relative to core European and U.S. issues. However, because substantial risks remain and volatility is likely to remain high, our global credit analysts are focused on identifying attractively valued issues with shorter maturities. Expectations for additional measures from China following relatively low inflation numbers also bolstered investors' appetites for risk.

Demand for municipal and high yield bonds remains strong

Municipal bond 10-year yields are still well above 100% of comparable Treasury yields. The technical factors for munis remained positive, with net supply expected to be flat to slightly positive for the rest of the year in an environment where fund flows are supportive. The search for yield continued as high yield credit spreads over Treasuries tightened due to strong investor demand, although higher-rated bonds are receiving the most investor interest. As a result, BB-rated corporate bond yields have fallen to historically low levels, and new issue pricing on high-quality issues has become less attractive from a bond holder's perspective. However, there is still value in higher-rated names that are likely to be upgraded to investment grade.

The U.S. economy continues to grow at a moderate pace

Economic data released this week provided further evidence of relatively modest but steady U.S. economic growth. The labor market is healing, home prices are stabilizing, and trade performance is sturdy, with the U.S. trade deficit narrowing thanks to higher exports and sluggish imports. Moreover, a healthier composition of second-quarter growth—less inventory building and stronger final demand—suggests that the domestic production growth trend will continue to be resilient in the face of slowing in other major economies. Thus, the urgency for additional stimulus from the Fed has declined over the past two weeks. Policy stimulus is more clearly called for, and more likely to be forthcoming, in the eurozone and in China than in the U.S., according to T. Rowe Price analysts.

U.S. Treasury Yields¹
Maturity	August 10, 2012	August 3, 2012
2-Year	0.26%	0.24%
10-Year	1.65%	1.57%
30-Year	2.74%	2.65%

This table is for illustrative purposes only. Past performance cannot guarantee future results.

¹Source of data: Bloomberg.com, as of 4 p.m. ET Friday, August 10, 2012.

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International Market

Week Ended August 3, 2012

International Stocks

Foreign stock markets closed higher for the week ending August 03, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 1.53%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	1.53%	5.25%
Europe ex-U.K.	2.04%	5.67%
Denmark	0.29%	21.62%
France	2.41%	5.86%
Germany	2.30%	11.27%
Italy	3.69%	-6.86%
Netherlands	1.52%	6.38%
Spain	2.02%	-19.90%
Sweden	3.86%	15.26%
Switzerland	1.22%	7.81%
United Kingdom	2.15%	7.01%
Japan	-0.16%	-1.41%
AC Far East ex-Japan	1.69%	7.86%
Hong Kong	1.87%	11.08%
Korea	1.39%	6.24%
Malaysia	1.68%	8.05%
Singapore	1.93%	24.05%
Taiwan	1.68%	4.09%
Thailand	2.07%	16.40%
EM Latin America	-0.59%	2.47%
Brazil	-0.46%	-4.13%
Mexico	-0.30%	18.52%
Argentina	-2.93%	-48.50%
EM (Emerging Markets)	1.23%	6.30%
Hungary	1.03%	16.53%
India	1.67%	7.72%
Israel	-0.03%	-3.84%
Russia	1.16%	6.40%
Turkey	3.34%	37.22%

International Bond Markets

International bond markets in developed countries were higher this week, with the J.P. Morgan Global Government Bond Less U.S. Index gaining 0.11%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.11%	0.63%
Europe
Denmark	-0.29%	-2.65%
France	0.55%	2.23%
Germany	-0.18%	-1.87%
Italy	0.20%	3.24%
Spain	0.58%	-9.00%
Sweden	2.02%	3.64%
United Kingdom	-0.81%	3.67%
Japan	0.10%	-0.07%
Emerging Markets	1.43%	12.38%
Argentina	3.40%	0.18%
Brazil	1.37%	10.02%
Bulgaria	0.25%	5.77%
Russia	1.06%	11.81%

International Currency Markets

On the currency front, the U.S. dollar was stronger against the major currencies for the week.


Currency	Close (August 3, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.595	-0.04%	2.11%
Euro	1.234¹	0.24%	4.94%
British pound	1.56¹	0.73%	-0.38%

¹U.S. dollars per national currency unit.

Sources: Foreign stock markets and currency sections are from Rimes Technologies, using MSCI data. International bond markets are from J.P. Morgan.

Note: All returns are in U.S. dollars. All bond indices are J.P. Morgan. All stock indices are Morgan Stanley Capital International (MSCI).

Equity Indices
EAFE:	MSCI Europe, Australasia, and Far East Index
Europe Ex-U.K.:	MSCI Europe ex-U.K. Index
Far East Ex-Japan:	MSCI AC Far East ex-Japan Index
Latin America:	MSCI Emerging Markets Latin America Index
Emerging Markets:	MSCI Emerging Markets Index

Bond Indices
Developed Markets:	J.P. Morgan Global Government Bond Less U.S. Index
Emerging Markets:	J.P. Morgan Emerging Markets Bond Index Plus

All charts are for illustrative purposes only and do not represent the performance of any specific security. Past performance cannot guarantee future results.