I must apologize as once more, we kick off this week’s view of last week news with reference to the Eurozone. It is by no means the only game in town, but it is certainly the most significant in determining market behaviour at the moment.
In a good mood…….
The eurozone had been in a surprisingly good mood in the 10 days since its leaders held their latest last-ditch meeting, the 19th summit of the crisis, or as the FT referred to it, the 19th Nervous Breakdown.
…….all is well with the world
What was seen as a positive, if very loosely defined outcome has led to the return of Ireland to the financial markets for the first time since its bailout in late 2010. There was relief in Spain following a successful bond auction (and a football match as well). Meanwhile, Italy announced another €26bn of spending cuts and Greece, still bouncing along the bottom, did at least form a pro Euro government. Net result……… European stock markets are up 5 per cent.
Or is it…….?
Short lived optimism it would seem however as the euro hit its weakest level in two years and suffered its biggest weekly fall all year whilst yields on Spanish debt passed the ‘unsustainable’ 7% level once again. How so?
Full Spanish bailout needed……..?
The jump in Spain’s borrowing costs came just a day after the European Central Bank and central banks in China and the UK loosened monetary policy in the face of sluggish economic growth and amid fears that whilst Spain has accepted a bailout for its banks, it may only be a matter of time before a full bailout for the government is needed.
Despite the relief that the Spanish managed to successfully issue Euro 3bn of short and medium term bonds, it should not be lost on investors that, whilst yields on the three-year paper were, on average, below the level paid at the last auction, the 10-year paper sold at a higher rate than last time.
As we keep flagging, the Euro crisis is a long way from being solved and we continue to urge caution in the absence of a clear and decisive strategy. That, it would appear, remains a long way off.
And I’m sorry to say that turning elsewhere brings little further cheer at the moment.
US growth crisis…….
If the eurozone was not grabbing our attention, we might be a little more focused on America’s recovery problem. The US is not on the brink of a potential downward spiral, but, without doubt, it is in the middle of a growth crisis.
Last month’s jobs report confirmed that the US recovery is stalling for the third year in a row. Having added 226,000 jobs a month in the first quarter of 2012, that has slipped to a mere 75,000 a month since March. Unemployment is likely to remain above 8 per cent until 2013. Growth is also slowing with forecasters anticipating gross domestic product will be unlikely to exceed last year’s insipid 1.9%.
Anticipation of QE3……..
Some are now touting the US market as a ‘buy’ in anticipation of further quantitative easing by the Federal Reserve, whilst the naysayers suggest that the US economy is not weakening fast enough to justify such an injection of liquidity.
Ignoring the signs……..
A quandary for investors, who should perhaps bear in mind that last week, the S&P 500 hit a two-month high, with the market having so far ignored signs of faltering global growth, worrying economic US data and a swathe of earnings warnings from big companies.
Fiscal cliff approaching……….
Throw in the impending annual ‘fiscal cliff’ whereby Congress becomes deadlocked on how to deal with critical fiscal deadlines (the cause of a US downgrade by ratings agency S&P in August last year) and the inactivity (in terms of getting things done) that comes with a Presidential election, and caution in the US may also be the name of the game, as well as in Europe.
9th July 2012