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Rates and the Dow's dive

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by Peter Switzer

Wall Street’s big dive overnight reminds us that stock markets are not out of the woods yet with Eurodebt concerns eroding investor confidence. And it’s a sober reminder of why the Reserve Bank’s aggressive interest rate stance could be far too pre-emptive.

Regular readers know that I’m a bull on share prices, but a cautious one. I think we — the global economy — will muddle through this near-depression crisis but I don’t expect it will be a trouble-free walk in the park.

There’s potential for the market to zoom ahead between now and April next year, as history shows this is a good time for shares. Ironically, as the air temperature on Wall Street heads toward freezing point, shares can go red hot but there are some serious, frosty headwinds economies have to cope with before investors on the sideline in cash come back to equities.

The overnight issues

The concerns over Ireland are not only stopping Irish eyes from smiling, they could water the eyes of many aggressive investors as well if the authorities in the Eurozone mishandle the latest debt drama out of the EU.

Before the closing bell on the New York Stock Exchange, stocks were down about two per cent, which is a serious sell-off. The European Union is looking at a rescue package for Ireland, which is likely to mean involvement from the International Monetary Fund.

The uncertainty of a bailout always spooks the market and has made it easy for short-sellers to get a rare win in recent times. And so the big watch will be on how the European officials handle this whole affair.

Another news story, which was negative for some key stocks, was a report that China is heading to food price controls and working against commodity speculation as an anti-inflation measure.

Local hit

This hit commodity prices with the oil price losing around two per cent and this, along with the Wall Street's overall dive, is bound to rock local markets today.

Hopefully, these negatives will be dealt with quickly but if they’re not and if they’re dealt with ineptly, which you can expect out of the EU, this Ireland debt debacle could turn more ugly than it should.

If that happens, then the Cup Day interest rate rise will look too pre-emptive, too complacent and plain stupid. I hope our highly respected Reserve Bank never looks stupid and I say that for purely personal, material reasons!

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Published on: Wednesday, November 17, 2010