Even though Spain is no Greece in terms of GDP (Spain is way bigger), it could be that Spain falls into the role that Greece has filled for some time – the bad boy unable to meet its economic commitments to the EU. If this happens, it will be a much larger deal than what we saw with Greece.
Barroso [EU President] refused to be more flexible on the deficit objective of 4.4% of GDP at the end of 2012, despite [Prime Minister] Rajoy’s pleas that the target cannot be reached.
With the highest unemployment in the EU and pressure from the people mounting, PM Rajoy will have a tough time cobbling together the votes necessary to introduce more austerity measures. Currently, this seems to be under the radar, but it will eventually make the headlines. If we thought Greece roiled the market when it went through the same process …
So, here’s the thing. The market bolts out of the gate yesterday. It appears as if the DOW will hold onto 13,000 solidly, and then Fed Chairman Bernanke speaks, punching a hole in the bucket. Sure, we have seen this before, but the market reaction that followed just does not make sense for two reasons. Here is the first.
The U.S. economy started the year off well with busier factories, higher retail sales, more jobs and growth in home sales. The Federal Reserve said Wednesday that all 12 of its banking districts reported some level of growth in January and the first half of February. Manufacturing output rose in all districts. Auto manufacturing, steel makers and other metal producers all reported solid growth.
Could the economic news get any better than this? Everywhere there is economic improvement. When one puts all of the recent economic indicators together, the market must surely believe things are getting better economically, yet, the swoon when he spoke …
The second reason the market reaction did not make sense is that the substance of what he said reflected the reality that even he believes the economy is improving, so much so that he effectively said that any more measures from the Fed to assist in reducing unemployment are on hold, indefinitely. Translation – no QE3. So how does the market take this as bad news?
My answer is this. The market is still running on light volume, which means traders have the edge for moving the market. Remember, “Bond funds over the past four weeks have taken in a staggering seven times as much money as equity funds.” Given this, then, and given the influence of high-speed computer trading based on technical considerations, it is not hard to see how yesterday’s initial bump down could turn into a slide downhill.
Although I just wrote this, and it does make sense to me, one thing about yesterday’s market action still leaves me perplexed. When the sell executions exhausted and the buyers took hold again, what then happened at the end of the day? Why the big sell off?
Could it be the bears saw an opening yesterday with the progressive and steady slide? Could it be that trader sentiment changed when seeing such a vigorous negative response to what ostensibly were two pieces of good economic news? The market open today will tell the tale, but don’t be surprised if the bears come out swinging.
Trade in the day – Invest in your life …
