US Optimism Trumps Euro Pessimism

12/03/2010 8:55 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

For a day, Goldman Sachs and strong US retail sales and housing numbers trumped disappointment over a tepid response to the euro debt crisis from the European Central Bank.

Thursday morning, Goldman Sachs raised its rating on US financial stocks to overweight and predicted a 20% rally in the Standard & Poor’s 500 stock index by the end of 2011. Same-store retail sales grew by 5.3% in November, way above the 3.5% expected. Pending home sales soared by a record 10%.

For the day, the big European indexes, the FTSE in the United Kingdom, the DAX in Germany, and the CAC in France, finished up 2.2%, 1.3%, and 2.1% respectively.

In the US, the Dow Jones Industrials finished up 0.95% and the Standard & Poor’s 500 up 1.3%.

Quite a turnaround from what had begun as a rather dour day.

At a Frankfurt press conference that began at 2:30 local time (equivalent to 8:30 am New York Time), European Central Bank President Jean-Claude Trichet disappointed financial markets that had hoped for news of a big increase in government bond purchases from the euro zone’s central bank.

The euro, which had traded as high as $1.3217 before Trichet spoke, dropped to $1.3085 shortly after he talked.

Thursday’s meeting of the 22-member governing council of the bank did signal that the bank would not begin to end its emergency policies of buying government debt and extending credit to troubled banks at the beginning of 2011, as some members of the council had advocated. The bank will continue those emergency policies “with full allotment as long as needed, and at least until April 12,” Trichet said. The central bank also left its benchmark interest rate at a record low of 1%.

But financial markets had hoped for more—and Wednesday’s huge rally had anticipated more. Speculation raged that after the Irish “rescue” plan failed to stop the euro crisis from spreading to Portugal, Spain, Italy, and Belgium the bank would announce a big increase in bond buying—something like the Federal Reserve’s $600 billion QE2 program of quantitative easing scheduled to run through June.

The bank wasn’t willing to go that far. Yet.

Which leaves national governments in Portugal, Spain, and Italy pretty much alone in their fight to convince the bond market that they won’t require a rescue package. Given the weak political position of each of those governments—it’s a day-to-day question if they can scrape up a majority for any vote on budget cuts or new taxes—that’s a lot to ask.

For one day, at least, the markets were willing to look past that problem.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio here.

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