Wednesday, July 25, 2012


I see a lot of volatility in the global financial markets till 2015. Markets are swinging into all directions these days, not from hopeful to guarded but rather, from panic to despair, as positive news is hitting the wire with less and less frequency. Corporate profits will hit rock bottom and massive umemployment is on the way. There will be more volatility and downside risk to the market creating massive selling pressure. USA is set to hit recession by Q-1 2013 with high unemployment rates and softening retail sales and confidence numbers indicate the world's largest economy is facing something more sinister than a soft patch. UK is already in recession while Europe is a sinking ship with no life. The European debt crisis is getting worse, as borrowing costs soar in Spanish bond markets on fears the country will need a bailout. China's once red-hot growth rates are cooling but it will rebound with GDP expected to touch 8.7% in H2 going forward. With such uncertainty building, expect volatile market swings fueled by fear-based trades to continue. The market sits somewhere between panic and despair. People are worried, market policy makers have thrown everything people can expect but still the slow down continues. Europe, meanwhile, must pay down massive debt burdens, which won't happen overnight. Europe's economy will go in deep recession for the next 3 years. 

A giddy mix of slow developed world growth and a meaningful cyclical slowdown in the emerging markets makes growth in the second half and therefore earnings vulnerable. The most visible sign of stress is the European crisis and this rumbles on. Talk that Greece may default on its debts and exit the euro-zone has gone on for some time now, with many hoping for policymakers to design an orderly exit for the country while keeping the larger Spain and Italy in. That might no longer be possible but will happen soon as countries will find the exit door from the euro zone. Yields on the 10-year Spanish bonds have soared beyond 7.60 percent, well above a 7 percent level branded as out of hand by the markets and suggesting the country needs a massive financial lifeline.

Euro-zone nations have created a financial firewall, known as the European Stability Mechanism, to prop up struggling economies, though a court in Germany is mulling a case to decide if bailing out other nations violates national law. That court isn't expected to decide anytime soon, which hampers policy makers' room to act. As a result, a messy Greek exit from the Eurozone is becoming increasingly likely, which could prompt the larger Spain to default and ditch the currency as well. Although it is frequently argued that a Greek exit is now manageable, no one knows what the consequences of such a development would be, especially now that Spain looks more likely than ever to have to apply for a full program and Europe's weak firewalls seem likely to be tested. 

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK. 

No comments:

Post a Comment