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BEING STREET SMART by Sy Harding EU Rescues Markets Just in Time - Again! June 29, 2012. At their 19th summit meeting since the eurozone
crisis began two years ago European officials once again demonstrated their
willingness to take markets to the very brink before taking action. And once again it worked, with markets rallying in hopes
that the actions just announced will be more lasting and meaningful than the
previous rescue efforts. From the timing, one could get the impression EU officials
spent much of their meeting on Thursday watching markets before feeling forced
to reach an agreement. Markets in Europe had already closed down again on
Thursday. Yields on Spanish and Italian bonds had risen to levels where bailouts
of Greece, Portugal, and Ireland had previously become necessary. And in the
U.S. on Thursday the Dow was down 175 points and looking like the bottom was
about to drop out further, with an hour left to the close. Out of the blue word suddenly crossed the tape that German
Chancellor Merkel had cancelled her scheduled news conference, which was
expected to report lack of progress, and word leaked that a major compromise and
agreement had indeed been reached. The U.S. market plunge reversed on a dime, and the Dow
closed down only 24 points. Then after an all-night EU session, a further announcement
was made giving more information on the EU agreement just before European
markets opened. And they surged up from the open, with the U.S. market also
surging up on Friday. The question now becomes whether the actions promised will
be enough this time to finally contain the eurozone debt crisis. They seem to be
significant. But then, each previous action had to be greater than the one
before, as each failed to work. Details are still missing, but the agreement being hammered
out over the weekend is apparently one of immediate short-term actions, and an
outline for a long-term plan that will be delayed until a study is completed for
their October meeting. Short-term actions include allowing European banks to
borrow money directly from the euro-zone bailout programs, rather than the funds
going first to the country’s government and then to the banks, which was adding
to government debts. And the bailout funds can also now be used to buy the bonds
of individual euro-zone countries having difficulty selling their bonds, with
the European Central Bank given more power to oversee the bailout funds. Like the previous emergency actions of the last two years,
this one seems to be another short-term fix that will hopefully buy enough time
to come up with a longer-term solution. The problem each time in the past has been that as soon as
the markets seemed relieved by the short-term fix, officials returned to
bickering and dysfunction that pushed off the formation of the promised
long-term plans and allowed the crisis to come back in a more drastic form. But we shall see. Maybe this time will be different. Meanwhile, it does have a spooky similarity to last summer. Last summer the market topped out on May 1, as it did this
year. Last year the summer correction seemed to end at its low on June 29, when
it spiked up in reaction to the euro-zone debt crisis easing overnight,
accompanied by Fed Chairman Bernanke’s statement that the Fed was ready to act
“if needed”. But the rally early last July lasted only until July 7, when
the market topped out into its much more severe second leg down to the October
low. It had run into the reality that the easing of the eurozone debt crisis and
Bernanke’s promise, did not change the fact that the U.S. economic slowdown was
still worsening. And indeed the economy continued to deteriorate, as did the
stock market, until the S&P 500 was down 21%, and the Fed did finally step in
with ‘operation twist’. And here we are with markets spiking on the same day this year as we end a dismal 2nd quarter and enter July, and on a similar catalyst of a promised easing of the eurozone crisis, and the U.S. Fed standing aside but promising to come to the rescue “if needed”.
And just as was the case with that one week spike-up from
June 29 last year, the latest efforts to solve the eurozone debt crisis do not
change the fact that the U.S. economic slowdown continues to worsen. And unlike
last year, this year the worsening U.S. economy is accompanied by slowing
economies around the world, with many major global markets in bear markets as a
result. Am I excited by the EU actions and the market’s sudden
upside reversal? Not yet. Let’s wait and see what happens after the July 4th
holiday when the next monthly jobs reports is released on July 6. One thing
we can be fairly sure of. The market’s recovery, even if it turns out to be only
brief, and the actions being taken by European officials, will take the pressure
off an already reluctant Fed and have it even more reluctant to come to the
rescue anytime soon.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost Editors: You are welcome to quote from this article, or use it in its entirety, in your publication or on your website, as long as the credit in the above paragraph is also included. Readers are also welcome to e-mail, or print and snail-mail it to friends. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Subscribe to RSS Feed
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