Stocks back from the brink
03 December 2010
The Macro Trader’s view:
As the Irish economy came close to meltdown and the World held its breath to see if the Euro zone would put together a timely rescue big enough to satisfy markets, equity markets sold off. Indeed, even after the rescue deal was announced markets remained nervous.
The fear was that Ireland was just another domino in a line ready to fall with traders switching their attention from one weak peripheral economy to another. The first to require a rescue was of course Greece and although Ireland adopted a severe austerity program earlier in the year, it wasn’t enough.
The Irish Banking system was in deep trouble and Ireland simply didn’t have the resources to rescue its own banks. But traders were not convinced the crisis was over and they turned their attention to Portugal and Spain.
Both countries saw their bond yields soar to record levels, prompting Portuguese authorities to warn about the real threat now facing their banks. Spain was also forced to deny she needed financial assistance, which was echoed by the EU authorities.
But still traders were not convinced and for a while stocks and bonds sold off in tandem. If Portugal ultimately required a rescue, that would be manageable. But if Spain too needed a rescue that was something completely different. Spain is the Eurozones fourth largest economy and where would the burden fall? With Germany of course. And even Germany cannot absorb these de facto transfers of debts endlessly.
But at last the ECB woke up to reality. There may not be a central Bond issuing authority in the Euro zone, but there is a Central Bank and it can pump liquidity into the system in any size it chooses. Which is what has been happening, and in addition, it can purchase any quantity of Euro zone originating debt in any size it chooses.
Until recently some on the ECB’s governing council have been against this, most notably the German representative Prof Weber of the Bundesbank. But now he too has realized the real dangers facing the Euro, the Euro zone and the EU itself.
The change of sentiment at the ECB has allowed ECB President Trichet the freedom to warn the markets that the ECB could start buying Bonds in size and the mere prospect has lowered Bond yields of Portugal and Spain and seen stocks rally hard as traders judge the crisis might just be brought under control.
Whether or not the Euro zone debt crisis is over is too soon to say, but equity markets are breathing a huge sigh of relief.
Mark Sturdy
John Lewis
Seven Days Ahead
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