Busch: European Land Mines
Bad news Monday on a Tuesday is really a continuation of Friday.
To help lift you out of the Memorial Day weekend fog of beer, brauts and brownies, Fitch downgraded Spain from AAA to AA+ and this announced rekindled fears of more-bad-things-happening-quickly for Europe.
In quick succession from Monday to Tuesday, we’ve had the following:
- Negative BusinessWeek article on Italian muni losses.
- ECB Financial Stability Report detailing potential losses of E195 billion for European banks.
- ECB comments stating they are sterilizing all of their bond purchases.
- ECB comments stating there is no Plan B for Greece.
- ECB stating they are happy with the level of the Euro.
- ECB stating that they can solve a liquidity crisis, but not a solvency crisis.
- Rumors of an Italian and Spanish debt downgrade.
- France saying it’s a stretch for them to maintain their AAA rating.
- China PMI slipped more than expected.
- BP can’t cap its oil gusher in the gulf.
Extra credit: it’s the start of the hurricane season! The good news of virile Canadian growth, stronger than expected UK PMI and German PMI are ignored.
The global PMIs are showing a more mixed result as we move through today, but initially they were all worse than expected. The developing theme is that China and others are experiencing slower growth due to the slowdown in Europe. With that theme, there are articles circulating about the drop in commodity prices signaling a global slowdown.
But do they really?
How can we separate the speculative flows of money into and out of commodities versus the normal ebb/flow of economic demand?
I’d take these stories with some hefty skepticism.
The one fact that is irrefutable: uncertainty drives fear and lower asset prices.
From the oil spill to the flash crash, we’re now in a psychological “mistrust-of-government-ability-to-act” zone. It’s the opposite of when President Obama took office and an unemployment rate near 10% will do that to opinion polls. The ECB’s decision to remain mainly focused on inflation instead of working in concert with European Union finance ministers is also greatly adding to market miasma that’s swirling in the wind like mustard gas. Risk is blistering as each new story out contributes to the negative newsflow.
The best news is that the Federal Reserve will remain in the emergency mode for some time due the European debt crisis.
Like other bullish economists, I believed that the growth in the US economy and the nascent job creation would lead the Fed to begin raising rates by the fall. Growth in the Far East and emerging markets had been major positive drivers to the global economy since last summer. Unfortunately, this frenetic growth has slowed simultaneously with the Greek tumult and this has scuttled my interest rate scenario for now. As an example of the new “Rates Low Until 2011” theme, the FT’s Kaletsky today writes that zero rates are likely to stay until the spring of 2011 in all the leading economies.
Until the US generates at least two months of significant non-government job growth, the markets will remain fixated on what new land mine will be stepped on in Europe. Welcome to the start of summer.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.