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USA vs. Europe

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by Peter Switzer

Big businesses are bailing out cash-strapped European banks that used to borrow from other banks and this underlines how Europe’s concerns will act as a break on stock prices going up. Meanwhile, the US reporting season started today with Alcoa reporting better than expected.

If the Yanks can produce better-than-tipped outcomes for Wall Street companies on the back of an improving US economy and the Europeans can start impressing the market, then stock prices will take off.

So the question is — how long will it take for Europe to cement a more credible plan to tackle its many problems? And related to this, the depth and the breadth of the recession in Europe will play a role in determining how our share investments fare this year.

EU credibility

On the credibility of the EU’s policies to fix its debt problems, the fact that big companies are risking their cash with European banks is a positive sign. According to Reuters, “One market participant said in one key area of lending, companies now accounted for 25 per cent of these deals”.

Sure the deals come with guarantees but it’s still a good development with many quality European and US companies sitting on billions of euros and dollars in cash at the moment.

The technique used for companies to lend to banks is called the repo trade. Here the company buys an asset (collateral) from the bank and then the bank will sell it back at a lower price in the future. So the bank cops a ‘haircut’ on the deal to secure badly needed cash.

Overnight Wall Street was tentatively positive with the S&P 500 up 2.89 points to 1280.7. Expert market watchers think 1300 on the S&P 500 index is critical and if US company reporting comes in positive and Europe shows some overdue leadership, then stocks could move in the right direction.

However, the new EU treaty won’t be signed until 1 March and so we’re bound to be victims of the negotiations that will go on before some agreement happens. Also bond auctions for the main EU members will be closely watched by equity markets.

Markets decoupling?

Back in July 2011, the fourth quarter growth of earnings was expected to be 17.6 per cent but this has been cut back to 7.8 per cent. If US companies beat this lower ball estimate, then it could help the decoupling of US stocks from the ill winds of Europe. And this should help Aussie stocks as well, provided China kicks in positively as I expect.

I liked the way the Shanghai Composite went up nicely yesterday. This index has been battered in 2011 and a comeback here would be great for our stocks.

One other positive sign out of the US was consumer credit for November. It was up $20.37 billion, against economists’ forecasts of $7 billion. This was the biggest gain since 2001!

This year will be the US versus Europe and I’m putting my money on the Yanks.

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, January 10, 2012

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