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No fear today

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by Peter Switzer

The Irish scare has abated for the moment and it was comforting to see the Dow Jones index only down 15.62 points to 11,007.88 and the S&P 500 actually closing out of negative territory. Of course, it doesn’t mean that we’re free of debt disaster concerns but it suggests that the people in the know might be feeling more comfortable today than they did yesterday.

Remember, markets don’t wait for explanations before they sell. If a curve ball is thrown, the day-to-day traders head for the bunker.

Surveying websites for reactions and analysis, I headed to the UK, where the the Telegraph’s economics editor, Philip Aldrick, put the matter into perspective and probably explains why the market reaction has been less dramatic today.

“Some form of bail-out now seems both inevitable and imminent,” he wrote. And this is positive because the Europeans have dragged the chain on past rescue missions.

“Is it six months or a few days away? I’d say it’s closer to days,” said Christine Lagarde, the French finance minister.

Not just Ireland

The Irish Government, like a drunk on a lamp-post, is arguing they are alright and pointing out that they have funding until mid-2011. The politicians are portraying the matter as a banking problem to save face but the finance high-flyers from the EU will, hopefully, go to the heart of the matter and a team of experts have headed to Ireland to sort the matter.

However, according to Aldrick, Ireland is not the only case in the basket.

“Portugal, on the other hand, is under more immediate pressure to raise funds,” he explained. “Reasonably, Ireland is arguing that it should not be bailed out to rescue Portugal.”

As you see, it’s complicated and markets are in the hands of the EU officials who in the past have not covered themselves in glory with bail-outs and policy responses.

We will have to give them another chance as the Irish banking sector is worth 400 per cent of GDP but it is “stuffed full of toxic real estate debt and underwritten by the state,” and Aldrick concludes, “… the nation is trapped.”

US overnight

In the US, retailers reported better-than-expected, which is good news considering the US consumer is critical to a better-than-expected economic recovery. Meanwhile inflation came in at a 0.6 per cent annual rate, which shows that QE2 is unlikely to cause hyper-inflation and in fact builds the case for pumping up the money supply.

The watching of markets is never a dull experience.

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, November 18, 2010