If Europe had indeed been ‘saved’ forever, then the euro would have kept climbing yesterday.
It fell below $US1.27 overnight, a cent under the $US1.2775 close last Friday, all the gains of Monday wiped out. It later regained the $US1.27 mark, but then sank again to around $US12630.
It’s weak.
Gold hit a new closing high in New York of $US1,2 33.90 an ounce, (the Comex June contract), a good indicator of the degree of worry in markets about debt, Europe and growth.
Spot gold hit a record $US1,234.50.
Shares in Europe and the US fell after Asia tumbled. The Chinese market is now in bear territory, down 21% for the year so far.
It lost 1.9% yesterday as inflation and house prices rose again in April.
For our markets, what’s happening offshore is of greater importance than last night’s Federal budget.
So Monday’s relief rally was a one day wonder and no amount of bright talk from analysts, bullish prodding from those long in equities in the US, or the European cheer squad, can disguise the fact that having entered unchartered waters, there’s no roadmap to safety.
Guess what brought the slowdown, second thoughts about what it really means to spend or commit a trillion dollars bailout of an entire economy that spreads across 27 countries, because the problems lie in five or six of them in a separate group called the eurozone.
Questions like will Italy, Spain, Portugal and the UK follow the likes of Ireland (already cut) and Greece (promising to chop) in hauling back on spending, and cutting deficits and trimming debt, a process that will have to go on for the best part of a decade.
The prospect of a decade of austerity doesn’t do very much for the earnings multiples of companies or markets. They are irrelevant, despite what the analysts and other cheer squads might argue.
Markets now know that Europe is living beyond its means. Traders estimated that the European Central Bank has spent around 15 billion euros buying greek and Portuguese Government debt on Monday and Tuesday. Yields fell, but for how long?
Spending exceeds income, for all the vaunted ability of the German export machine: its debt to GDP ratio is over 80%, France, another claimed super power of Europe, hasn’t had a balanced budget in three decades and the UK has a deficit of 12% of GDP and a debt to GDP ratio that will rise in 2012 and possibly 2013.
On top of these second thoughts, markets in Asia had to contend with higher inflation and house prices in China and a distinct slowing in industrial production: all are bad news.
Political uncertainty put pressure on sterling as the UK Labour Government tried to seduce the Liberal Democrats into bed in a government that won’t be all that appealing to markets.
Prime Minister Gordon Brown said he would step aside to try to keep his Labour Party in power. He stepped down overnight and recommended that the Queen send for Conservatives leader, David Cameron and ask him to form a government.
Moody’s Investors Service on Monday said it may still downgrade Portugal, and Greece’s rating could fall to as low as junk.
Moody’s has its own worries, its shares fell in Monday’s 400 point surge on Wall Street because the SEC is upset and probing its 2007 registration (which means its licence to be a rater of credit and debt).
The euro slid 0.5% to 118.56 yen, a day after jumping over 2% versus the Japanese currency.
Following the announcement of the plan, the euro initially surged to near $US1.31, rebounding from a 14-month trough of $US1.2510 hit last week.
But it fell to under $US1.27, but then eased back to around $US1.2870.
The Australian dollar rebounded above 90 USc, but late yesterday it was trading closer to 89 USc.
