Perplexed by what’s really behind the latest down trend ,and whether that down trend is just the beginning of something more severe? Now you can get up to speed fast.
Here’s a summary, short and sweet, what’s propelling markets in their steady descent, driving the S&P to once again test its 200 day moving average long term support.
From a technical perspective, any sustained move below that line is an official bear market.
1. There are justifiable doubts about how the latest € 750 EU/IMF plan to prevent a wave of member defaults and ensuing banking and economic crash plan would be implemented and enforced in a way that would avoid a repeated crisis in the future. It’s not just that the plan lacks details – that was to be expected given the sudden assembly of the aid package May 8th-9th as markets crashed and world leaders had one weekend to produce the initial plan. Other incidents feeding doubt include:
a. Popular Greek opposition to the spending cuts both in parliament in violent street protests and strikes
b. Popular German opposition to paying for the bailouts as shown in Sunday May 9th elections that cost Merkel control of the upper Bundestag, and German academics challenging the legality of the payments
c. Deutsche Bank’s CEO doubts Greece will ever fully repay its debts
d. Former Fed Chairman Paul Volker questioned the EU’s survival
e. So did PIMCO CEO Mohammed El-Erian
f. On Friday, a report that French PM Sarkozy had needed to threaten Germany with a French withdrawal from the EU to get German participation for the prior, much smaller bailout
2. EU Crisis Means Deflationary Double Dip For All: The plan may prevent economic collapse, but brings deflationary recession. While all agree that the PIIGS and most developed nations need to cut their budget deficits, it is also clear that spending cuts will hurt GDP growth in the short term for all, especially the PIIGS block nations, which are likely to enter deep deflationary recessions similar to that already experienced by Ireland in the wake of its austerity programs, given that they already suffered from weak growth before the cuts. That means the EU is virtually assured of a double dip recession, an extended period of low interest rates. Given that the combined GDP of the EU is roughly equal to that of the US, this in turn means slower worldwide growth as this huge export market shrinks.
3. Add to that an already tightening China that will eventually slow its growth rate, and a deflationary double dip is looking increasingly unavoidable, despite continued growth in China, certain major emerging markets, and even, to a lesser extent, in the US.
4. All the above make the world economy more vulnerable any additional destabilizing events. There are plenty such potential threats. Prime candidates in the short include:
a. As we’ve noted before, the US is set to begin a wave of mortgage resets of a scale similar to that which caused the sub-prime crisis in US banking and the eventual crash in late 2008-early 2009.
b. Limits on profits to banks in the wake of new regulations. These are necessary, but are also likely to limit bank profits. The financial sector has led markets in and out of every major market move over the past years, so markets are sensitive to the fate of the financials.
All this is really spooking markets.Last week, the French CAC was up over 9% Monday following the latest bailout news. As of early Monday. Major Asian indexes were down typically around 2%, with the bellwether Nikkei down 2.17% and the Shanghai exchange – which has led US markets up and down, plunging a manic 5%! Europe is also opening lower.
These kinds of wild swings we’re seeing over the past 10 days are signs of a scared market. Sentiment this strong is unlikely to reverse soon.
Disclosure: No Positions