Given a weekend to think it over, the financial markets decide they're really disappointed in the results of Friday's European summit
12/12/2011 3:54 pm EST
In Europe the German DAX Index finished the day down 3.4%, the French CAC Index was down 2.6%, and the Spanish IBEX 35 Index was down 3.1%. As of 3 p.m. in New York the Dow Industrial Average was down 1.9% and the Standard & Poor’s 500 was down the same .9%.
Actually given the extent of the negative reaction, it’s surprising that the damage isn’t worse. Going into the summit, the hope was for a plan that 1) started rebuilding confidence in the national finances of countries that included Italy and Spain by approving new austerity plans for threatened countries, 2) provided immediate support for the Italian and Spanish bond markets, and 3) put the EuroZone on a clear path to reforms that would fix the basic problems in the single currency.
Today the financial markets are saying that on #2 and #3 the summit was a failure. European leaders walked away without a plan for supporting bond markets in the short term—all they have is a temporary commitment from the European Central Bank to the limited bond buying it was conducting before the summit. And the “clear path” to fixing the basic problems with the euro seems neither “clear”—since the treaty of 26 concept is of dubious constitutionality—nor a path—since no one knows how long it will take to get these reforms set up.
Only on #1 has real progress been made—and then only in Italy. But even there the technocratic government of Prime Minister Mario Monti faces a struggle to retain support in Parliament for its package of budget cuts and tax increase in the face of major strikes today in Rome.
This morning Moody’s Investors Service echoed Standard & Poor’s announcement last week that it was putting the credit ratings of every European Zone country except Cypress and Greece on credit watch negative. Moody’s said that it will review the ratings of all the European Union countries. The summit, Moody’s failed to produce “decisive policy measures.” The third of the big three U.S. ratings companies, Fitch Ratings, voiced an equal disappointment: The meeting did “little to ease pressure.” On those comments, the financial markets are justifiably worried that we’ll see downgrades to the debt of European governments in the near term.
Those downgrades would just point out, to any who have missed the point, that the summit did nothing to provide short-term support for the bond market. Downgrades that hit at France, Austria or any of the other remaining six AAA-rated countries in the EuroZone would make it even harder for the existing support mechanism the European Financial Stability Facility to sell bonds. (The facility “borrows” its AAA rating from those six AAA-rated countries.) Already bond yields on the facility’s offerings, sold for Ireland or Portugal, for example, since those countries are still shut out of the bond markets at anything resembling a reasonable interest rate, have been edging upwards. A downgrade would either force the facility to pay more to raise money or in a worst case make it impossible for the facility to raise all the money it needs.
And that would just remind the financial markets that the permanent and larger European Stability Mechanism isn’t set to start operation, on the accelerated schedule passed by the summit on Friday, until July.
I can see only two modest—very modest—pieces of news that suggest the damage to stock prices might be limited.
First, as of 3 p.m. at least, the U.S. indexes haven’t moved significantly lower from their depressed levels of noon. So far—and there’s still an hour to go in the session—selling hasn’t accelerated. If the day finishes in this pattern, and it’s a big “if”—that would be a very modestly positive sign for the rest of the week.
Second, the big economic news from the United States tomorrow will be November retail sales to be announced before the market open. October sales were up a strong 0.5% in October and the consensus among economists surveyed by Briefing.com is for even stronger growth of 0.6% in November. That, which would be read as a sign that U.S. economic growth remains surprisingly strong, might be enough to produce a bounce after today’s sell off.
If it sounds to you like I’m grasping at straws, I would just say, Remember how volatile this market has been. A big swing in the opposite direction tomorrow would just be par for the course over the last few months. And, of course, the euro will still have the same big problems tomorrow even if stocks do bounce.