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US good, Europe bad

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by Peter Switzer

October is the crash month and the worst for Australian stocks but September is the historically bad month for Wall Street. However, it was a bad start to October with US stocks sinking when European debt and banks’ fears KO’d more good economic news for the US.

The Dow gave up 258.08 points to end down 2.36 per cent at 10,655.3 while the S&P 500 index was off 2.85 per cent to 1099.23. This was the closing low for the year and only good European news will help.

For months, I have been arguing that the US economy could beat the double dip recession forecast and that we needed European politicians to pull off the big play on Greece and its overall approach to fixing the debt problem. Well, it looks like the US economy is better than expected but the Euro-challenge is still in play but when it’s solved it will generate a big market comeback.

Let’s review the latest on the US economy and just hope the remaining two countries in the 17-member EU vote to support the rescue plan for Greece.

Last week, US GDP came in higher than expected, rising at an annual rate of 1.3 per cent in the second quarter, and the Thomson Reuters/University of Michigan consumer confidence index rose to 59.4 in September from 55.7 in August. Overnight, we found the Institute for Supply Management’s manufacturing index for September went to 51.6 from 50.6 in August. This beat economists’ expectations. Also, construction spending was up 1.4 per cent, despite the expectation of a 0.3 per cent fall.

The green shoots in the USA for an economic recovery are becoming numerous and that’s a tentatively positive sign.

But there still is Greece and the EU to deal with.

The bad news on Greece is that it’s tipped to miss deficit targets for both this year and 2012 despite its austerity measures. This spooked European stock markets and spread to Wall Street.

Of course, the main cause was a deeper-than-expected recession in Greece but try telling that to panicky traders!

Europe will have centre stage this week again but US job numbers on Friday will also be closely watched.

Finally, this better-than-expected US economic news does set us up for a big rally if only Europe can do something credible to stop us worrying about a Greek default and the European banking sector under siege.

For Animal Farm fans, I have to say — USA good, Europe bad!

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: Tuesday, October 04, 2011

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