U.S. Treasury Secretary Geithner says that the debt crisis in Europe is Europe’s problem, and Europe has the means to resolve it if its governments would stop squabbling among themselves and take action. That seems to be the opinion globally, including among eurozone countries themselves.
But when it comes to getting beyond the generalities and rhetoric, the individual eurozone countries cannot seem to overcome their self-interests and rise to the task. For 18 months now their debt crisis has been worsening and spreading while officials only apply bandaids that soon peel off. Each time, assurances are made that new talks are underway and substantial measures will be announced soon that will provide a long-term solution. Yet month after month, eurozone officials do little more than provide still more assurances that they will announce something big ‘next week.’ And next week never arrives.
It has provided for extremely unusual week-to-week market volatility.
Their latest vows were that last weekend would produce the promised action. That pledge was then kicked down the road to this weekend, and the latest word from Europe on Friday was not to count on that either - but an agreement should be reached by next Wednesday.
The difficulty in maintaining confidence under such conditions can be seen in the action of global stock markets, including that of the U.S., and the sagging consumer and business confidence in Europe and the rest of the world.
The sad part is that there are indications that the U.S. economic slowdown may have bottomed, and a nascent recovery may be underway. But its potential may be gut-shot by Europe if Europe does not act in a believable manner to solve its debt problems, and instead brings economic disaster to the world by failing to do so.
Yes, for the first time this year, the trend of U.S. economic reports is potentially beginning to turn positive.
Just in the last two weeks we’ve learned that U.S. industrial production edged up 0.2% in September. There were 103,000 new jobs created in September, much better than forecasts of only 60,000. Auto sales picked up in September, coming in at the high end of analysts’ forecasts. Retail sales were up 1.1% in September, the biggest increase since February. New housing starts jumped 15% in September to a 17-month high. The Fed’s Philadelphia Manufacturing Index jumped from minus 17.5 in September to plus 8.7 in October, much better than economists’ forecasts. It was the first positive reading in three months. The new orders portion of the report rose to plus 7.8 in October from negative 11.3 in September. The Philly index is closely watched as a frequent bellwether for the national ISM index.
Meanwhile, third quarter earnings reports so far, while not fantastic, are coming in strong enough to provide optimism, considering the sharp decline in economic growth this year. Bloomberg reported Thursday that of 126 S&P 500 companies that have reported so far, 73% reported earnings that were higher than the same period last year.
Concern about the U.S. economy, the world’s largest, potentially declining further into a recession has been a major drag not only on the U.S. stock market, but on global markets and confidence.
So the recent indications that the economic slowdown in the U.S. may have bottomed is a substantial potential positive for global confidence.
If only investors and analysts could ignore what is going on in Europe. If only what comes out of the important EU summit over this weekend does not plow under the seeds of hope that are now sprouting in the U.S. economy.
After being bearish all summer I like what I see in the technical charts of many markets.
But Europe has global markets and economies at a critical juncture, with their decisions next week more important than any they have made in the last 18 months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.