The Experts

Put your optimism on hold

Better than expected corporate reporting news in the USA has now been trumped by the misguided Euro-loonies who, because of their collective immaturity, lack of vision and their inept leadership, have forced the world’s stock markets, as well as the world economy into another tight spot — again!

Our stocks will dive today after the UK, French and German markets lost between one and two per cent on Friday but the Spanish IBEX 35 was down 5.82 per cent! That’s a serious drop, which will have to be contained or we all will face a sell-off on stock markets.

The trigger was the region of Valencia facing facts and asking for a bailout. This has sent bond yields in more risky countries such as Spain and Italy up and those in the likes of France and Belgium down. Of course, everyone would want to buy German bonds but as they are so safe and everyone is chasing them, their real yield is negative.

As one smarty put it, to explain the above, the big issue for bond investors in Europe is “not return ON capital but return OF capital!”

Contagion fears

The new fear is that the Spanish Government will be next to ask for a bailout and if the EU came to the rescue, then the contagion fear would rise and Italy would be next in the frame. That would be a scenario no one wants to contemplate.

The Wall Street reaction to Spain’s new troubles was not too dramatic but that could come this week. The Dow dropped 120.79 points or 0.93 per cent to end at 12,822.57.
Meanwhile the S&P 500 dived 13.85 points or 1.01 per cent, to 1362.66. Interestingly, the VIX or fear index was still only around 16 but that could change if the Spanish problem is not resolved pronto.

What’s worrying is that all of this happened in Europe as eurozone finance ministers lent 100 billion euros to Spain’s banks so they could recapitalize.

Back to the USA and GE did better than expected, just, but its revenue was down a tad. This has become a bit of a theme and it’s a direct result of a slowing world economy, thanks to a Europe, which has hurt China and the USA, which then hurts US global companies, such as GE, IBM, etc.

What to watch

Europe will hold centre-stage for stocks but US company reporting will be an important sideshow. Economic data will help paint a picture of the US economy with the latest GDP read coming out on Friday.

Locally, it’s a week where inflation is the focus with the CPI number out on Wednesday. This will spark interest rate speculation for the next RBA board meeting in August but once again, Europe and Spain will be far more important for the Reserve Bank.

If we can fob this worry off, I will be more convinced that the end of the bear market and start of a big bull market are closer than what many expected, but this is going to be a big ask, given the big size of the problem and the small size of the political pygmies who are charged with cutting it down to size!

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