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Euro-mess has two years to run

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by Peter Switzer

Investors are caught in a news flow trap where the belief that the stock market is oversold and that there are trillions of dollars on the sidelines waiting to get back into the market fights the fear of another European drama that could bring the market down again. Of course, as Greece grapples with firstly, its leadership issue as a new PM is expected to be named by tomorrow and secondly, the bailout package that hangs in the balance, the uncertainty of Italy has become a new reason not to go long shares.

To prove my point about how everyone is craning their necks to hear some good news, Wall Street reversed an earlier negative trend on the strength of a European Central Bank announcement that the EU’s financial mess will be fixed within two years.

Also the EU’s finance ministers are meeting and they’re trying to fast track the expanded European Financial Stability Facility with a trillion euros in the bag to kick off in November rather than December.

Meanwhile, the EFSF got a bond auction away but demand was lower than expected and the bond yields were higher than was wanted.

Despite this better news, Italy remains the new big concern with their 10-year bonds’ yields up to 6.6 per cent, which is worryingly high.

At home and abroad

To Wall Street’s close, the Dow was up 0.71 per cent, or 85.15 points, to a 12,068.39, while the S&P 500 put on 0.63 per cent to 1261.12.

A good sign is the VIX or fear index which ended below 30, which shows if Europe can stop spooking everyone then stocks will go higher.

The resignation of the Italian Prime Minister Silvio Berlusconi could be some good news the market would love to hear but it has to be followed up with better news out of the Italian Parliament about who will replace him and what will be done to reform the government’s financial management.

On the local front, yesterday’s poor job ads numbers could point to weaker job figures on Thursday and if they’re worse than expected, then we could see another rate cut in December. I don’t think it’s on but some economists do and a really surprisingly bad unemployment number could easily tip the balance in favour of a cut.

Euro-mess clean up

One final point: if it wasn’t for the Euro-shock around the indebtedness of the PIIGS countries and the failure of the EU politicians to deal with this, I think stock prices would be miles higher. That means when the world starts to believe in the rescue plans that’s when stocks will go sky high.

Remember, US profit reporting has been excellent and this is how CNBC’s John Melloy summed it up: “With almost all of the third quarter results out, it’s safe to say that companies in the S&P 500 Index have achieved record earnings and profit margins on a quarterly and one-year basis, fully exorcising the 2008 credit crisis and reflecting the aggressive cost cutting efforts underway since that calamity.”

That means when the Euro-mess is cleaned up, there will be a massive bounce back!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, November 08, 2011

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