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The ghost of Europe revisits

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by Peter Switzer

Expect a bad day for stocks with concerns about Spain spooking markets, and also not helping, a weaker-than-expected reading on the US services sector. And these negatives outweighed a good private sector jobs report for the Yanks.

The summary is the unknowns of Europe will always take the wind out of the stock market's sails, especially if it involves the big players such as Spain, France and Italy. Not helping stocks was the Fed minutes this week, which poured water on the idea of another round of monetary expansion or quantitative easing (QE3) in the not-too-distant future or maybe ever!

This hinting from the Fed has been described as “someone taking away the punchbowl” for those investors who have been making easy money out of US stocks.

Wall Street overnight

Here’s the wash-up from US trading overnight:

The Dow lost 124.8 points, or 0.95 per cent, to 13,074.75.
The S&P 500 gave up 14.42 points, or 1.02 per cent, to 1,398.96.

The trigger for negativity came when the latest Spanish government bond auction didn’t go well. Yields on the bonds went higher and that was the market saying, “We don’t trust Spain”. It’s now getting the rough treatment that Italy got last year, which of course hurt stock prices.

This is a test of the European Central Bank and its funding of banks with a trillion euro via three-year loans to EU banks at one per cent interest. It’s also going to test the rescue funds that are in place supposedly creating a “firewall” to protect eurozone economies from the heat of speculators taking a set against such things as Spanish bonds.

The threat of the unknown will always create the opportunity for a sell-off and this is what’s going on now.

News – good and bad

On the other hand, there was some offsetting good news out of the US with the ADP employment report showing 209,000 new jobs were created in March, which confirms that the US recovery continues.

But it was not all great economic news out of the States with the ISM services index coming in less than expected. It was still a good, expansionary reading of 56 but 57 was expected. Also, analysts who broke down the numbers say there were a few worrying indicators in the figures.

The warm winter

There’s a feeling that the warm winter (which has been great for retailers as snow storms and blizzards have not kept Americans away from their favourite pastime of shopping) could mean that future spending has been brought forward and this could lead to a slowdown in retail spending later in the year.

Some 70 per cent of US economic growth has relied on the constantly consuming customers in the shopping malls of America!

So this is a testing time for Europe — let’s hope the good guys win as the ghosts of Europe 2011 try to revisit stock markets.

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: Thursday, April 05, 2012

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