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Anyone Surprised? Latest Euro ‘Solution’ Falls Flat
12/12/2011 4:22 pm EST
Given a weekend to mull over the results of the European summit on Friday, today the markets are blowing a big raspberry to the most recent plan to rescue the euro.
In Europe, the German Dax index finished the day down 3.4%, the French CAC index was down 3.4%, and the Spanish Ibex 35 was down 2.6%. As of 3 p.m. in New York, the Dow Industrial Average and the S&P 500 were both down 1.9%.
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:
- started rebuilding confidence in the national finances of countries that included Italy and Spain by approving new austerity plans for threatened countries
- provided immediate support for the Italian and Spanish bond markets
- and 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 Nos. 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 No. 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 increases 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 Cyprus and Greece on negative credit watch.
Moody’s said that it will review the ratings of all the European Union countries. The summit, Moody’s said, failed to produce “decisive policy measures.”
The third of the big three US 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 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 scenario, make it impossible for the facility to raise all the money it needs.
That would just remind the financial markets that the permanent and larger European Stability Mechanism isn’t set to start operation, even 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 US 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 US 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.
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, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.
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