You have to wonder if the Germans actually think that a prolonged period before resolution is preferable to something more market friendly and swift. I was only talking with a colleague last week about the different time frames in play at the moment. In Europe you can go to a city where there is a 1000 year old cathedral, visit cities where Julius Caesar once walked yet markets are now increasingly being driven by traders moving in minutes, seconds and increasingly nano-seconds.
So the Europeans may just have a different picture of time – they are not concerned about the ebb and flow of the day to day machinations of traders and speculators. No, they are concerned with trying to get the right long-term solution for them. But in our fast paced world where everyone seems to have a Smart phone, where Ipads and other wireless communication devices are making the world smaller it just seems that we are at cross purposes.
But for those who were hoping that the plan to announce a plan would be a quick fix got a serious dose of reality overnight with a spokesman for German Chancellor Merkel being reported on Bloomberg as having:
…made it clear that dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.
And so we saw markets retreat from the ebullience of the past few days. The Dow fell 2.13%, S&P 500 1.94%, DAX 1.8%, CAC 1.6% while in the new Switzerland, the UK, the FTSE was off only 0.54%. The Australian dollar is off 160 points or 1.53% and back at 1.0182.
The German comments above go right home to the senior continental politician – the German Chancellor – and are big issue for the outlook as market participants had elevated this weekend’s European meeting to a key stage gate for the rally – a magic bullet if you like. So it’s back to watching the economy which in truth has been printing data that while weak has not been as weak as the market had factored in, but weak nonetheless. It’s all a question of time frames really, for all the reactive rallies we get from weakness its not going to fix the economy which has years of headwinds ahead of it and whatever the economy its not going to hurry European leaders who are looking decades not months down the track.
But the risk is now that Europe does not get its act together in such a way as to continue to lift the market of its lows and focus attention away from the data.
Yesterday I wrote that the Australian dollar and equities were at or near the tops of these rallies. One swallow doesn’t make a summer nor does one nights reversal make a bear trend but remember those charts I showed on a number of markets that suggested they were trying to break out. They have failed on this occasion which turns the picture back inside the range.
Indeed an old colleague sent me a chart yesterday of the S&P’s performance from April 2008 (a couple of weeks after Bear Stearns fell over, to the lows in March 2009. This was then overlaid with the market’s performance this year. You can see it below – it is normalized so you can get the comparison:
It is clear we appear to be charting a very same course but potentially into a much bigger storm.
European politicians are right to be looking out into the decades to get a fix that will last the ages but there are risks. When I was a kid I remember crossing the road at Granville Train station on the way home from school. I didn’t see the car that hit me because I was watching the truck that was behind it.
Are we at risk of a similar occurrence in markets and the economy? Possibly.
Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.