Rally doubts grow
by Peter Switzer
It was always going to happen — doubts about this rally — and we’re seeing some early signs but nothing convincing at this stage. What got me thinking that the rally will be tested was a revelation I made on Monday that US stock market indexes were up around 10 per cent since June 4 while our S&P/ASX 200 was up 9.6 per cent. That made me think that it could be profit-taking time for fund managers and smart, short-term traders.
Remember, the main game is Europe and whether the European Central Bank (ECB) will announce bond buying in some shape or form to increase the money supply and reduce the interest rates that Spain and Italy are having to pay to flog their sovereign bonds. In those two countries, 10-year bonds were over seven per cent, which is unsustainable. Unless this is addressed, you can expect bailout requests, recession and possibly the break up of the euro.
Top European Union (EU) leaders say they don’t want this and so in early September it will be show and tell time in Europe. If they disappoint markets, it will be sell-off time in the spookiest month of all for stocks, from Wall Street’s historical perspective.
Overnight the Dow lost 68.06 points to 13,203.58 and that’s a 0.51 per cent loss. The S&P 500 gave up 8.95 points or 0.29 per cent to finish at 1413.17.
The VIX went up to over 15 but against this the Nasdaq during the day hit the best level since December 2000!
On the plus side, European markets went higher suggesting that the consensus is punting that the ECB will deliver. Bond yields in Spain and Italy were lower.
There were reports US investors are having doubts about the ECB and EU leaders and that was used to explain the market slippage but I think it’s simply profit taking.
The test remains for September 5-6 when the ECB will either make or break this rally.
For my part, I think the ECB will come through because this is make or break time for Europe, the euro, the global economy, China’s growth, commodity prices, world financial markets and our stock prices!
If they don’t deliver, then European politicians are bigger nincompoops than I have taken them for in the past.
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Published on: Wednesday, August 22, 2012
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