Europe disappoints! What’s new?
by Peter Switzer
Putting faith in the Europeans is about as wise as taking your super to the casino the day after you fully retire. The EU meeting in Brussels is the big watch for markets but the European Central Bank (ECB) let the markets down by opting to not act to bring bond yields down.
Two things did not help Wall Street and they both came from Europe — what’s new?
First the ECB President Mario Draghi lowered expectations that the ECB would buy a lot more bonds to help out the PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries. Yes, and bond yields in Italy went up, just when they were heading down!
The second worrying development was that the Sarkozy/Merkel plan to be taken to the EU members in Brussels doesn’t look all that enforceable from a collective point of view. The balanced budget imperative could be a responsibility of official bodies in each country! That’s like trusting a vampire to guard the blood bank!
As a consequence, the Dow was 198.67 points or 1.63 per cent lower to 11,997.7 and the S&P 500 lost 26.66 points or 2.11 per cent to 1234.35.
The ECB did cut interest rates by 0.25 per cent to one per cent and that’s a step in the right direction.
Banks cut rates
On the local front, wisely the Big Four banks have cut interest rates by the Reserve Bank’s full 0.25 per cent and it now paves the way for a stronger Christmas retail period, though I think we’ll have to see one more rate cut before those who have been stung by the RBA will start spending more freely and borrowing like there’s no tomorrow.
Outlook for 2012
Of course, if the EU members screw up over the weekend, stock markets will selloff, bond yields in Europe will go higher, worsening the expected European recession and that could lead to even bigger interest rate cuts here. But if all of this happens, we’ll be in for a shocking 2012 and you can kiss goodbye to the international leaders — Barack Obama, Angela Merkel and Nicolas Sarkozy.
This EU meeting is important and I really hope we get the result we’re hoping for. I said it earlier, that I didn’t like punting on long shots and the Europeans are exactly that — out of form long shots!
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Published on: Friday, December 09, 2011
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