Stock Market, Sovereign Debt, Currency Market; You Do Know We Are Going Around In Circles!

Posted on April 13, 2012

Stock market, sovereign debt, currency market; you do know we are going around in circles!

The U.S. stock market, U.S. treasury notes and bonds, and the U.S. recovery of itseconomy continue to be at the mercy of the European sovereign debt debacle. To quote a popular line in a TV detective show in the 1950s, “just the facts ma’am”- here are the persistent actions and reactions to the unresolved European financial crisis. Action; Spain’s borrowing costs have been steadily climbing since the new prime minister said that the nation is in “extreme difficulty”, and that the country will miss a 2012 deficit goal approved by the EU. Spain is in recession and its’ unemployment rate is near 24%. Spanish banks will probably need additional capital if the economy continues to weaken. With Spain’s new administration struggling to reduce the budget deficit and government over spending, borrowing costs have surged near the levels that had necessitated bailouts for Greece, Portugal, and Ireland. These problems re-introduce the anxiety of debt contagion in the EU, and concern that the global economic recovery is waning. Reaction; U.S. and global stock markets declined, the value of U.S. treasuries rose and the Japanese Yen got stronger vs. the US Dollar and Euro, as investors sought safety. Stock markets weaken, consumers slow down their spending, and confidence in the recovery falters. The Labor Department’s March report showed that jobs fell considerably short of forecasts.The increase in employment was the smallest in five months, and jobless claims unexpectedly rose this week, raising the question, should the Fed reconsider initiating a third round of accommodation financing (quantitative easing-QE3). Small businesses are at the forefront of the US revitalization in employment, and the latest report shows bank lending to small business barely grew in February, supporting the viewpoint that economic growth has been lackluster since the beginning of the year. Economists are forecasting that the U.S. economic growth will slow in the first quarter to around 2 to 2.5% down from a 3% annual rate in the last quarter in 2011.

Once again, who said what last has almost always had a changing influence on market directions. A European Central Bank Executive Board member implied that the ECB will revive its bond purchase program to lower Spain’s borrowing costs (as well as other EU countries, e.g. Italy) as the regions debt crisis is in danger to heat up yet again. With those comforting comments, the Euro  rose, and Spanish bond yields declined as markets and investors were reassured that the ECB would be there to save the day once again. U.S. equities advanced, breaking a five day volatile deterioration. All is right with the world…until the next time. Let’s stop going around in circles. We can only hope that the ECB, and perhaps even the Fed are anticipating and planning a line of attack in case of a return of substantial financial market turmoil. I’m getting dizzy.

For questions /information, contact Joel Borshof

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