Courtesy of Scott Martindale, Sabrient Systems and Gradient Analytics
After a nice pop last Friday and an aborted attempt to get it going again on Tuesday, stocks were down 3% for the week through Wednesday. Among the ten U.S. sector iShares, Energy (IYE) and Basic Materials (IYM) have led the market down this week. The “risk-off” movement has sent investors into the safety of the dollar and Treasuries at the expense of stocks and commodities.
As usual, the main story is the lack of a confidence-inducing solution to the debt crisis in Europe. The latest fears are being driven by rumors of further sovereign debt downgrades.
The big EU summit resulted in France and Germany essentially issuing an ultimatum to all euro-zone members to agree to greater central control over their national budgets, such as annual budget deficits limited to 3% of GDP, lest automatic sanctions kick in. Supporters are saying that France and Germany are simply trying to get euro-zone members to reaffirm the conditions they accepted when they joined the Union. In addition, the EU agreed to provide up to 200 billion euros in loans to the IMF, and to accelerate the start of a permanent 500 billion euro rescue fund called the European Stability Mechanism.
Nevertheless, investors aren’t confident that this is an adequate plan. Although the austerity part of it is encouraging, what is lacking is a compelling plan for stimulus. Fitch responded by downgrading five major European financial groups. S&P and Moody’s warned that they will review all EU country credit ratings.
The launch of the euro currency in 1999 gave the perception that risk would be spread among all of the participating countries, and indeed government bond rates traded in lock-step until the Lehman Bros bankruptcy in 2008. Since then, the variations among yields are now similar to what they were pre-euro. Today, the Greece 10-year bond is yielding around 35%, and the 1-year commands 330%-a rate that effectively makes it priced for imminent default.
Though the European summit disappointed, it doesn’t necessarily mean we won’t get our beloved Santa rally,…
