After spending two weeks in Italy and seeing that the underlying economy and the consumer are showing signs of life that Frank Lowy of Westfield and Paul Zahra at David Jones would swap their back teeth for, it brings us back to the prime reason why our stocks are being challenged – European leadership. That means we are in the hands of politicians for the next few months and in that time I believe there is a good chance some progress will be made to help stocks in the last quarter of the year.
To look at the immediate future, let’s do a geography tour around the world to see what we should be looking out for.
The first stop has to be Greece where, next Sunday, the Greeks will vote. Older Greeks are becoming wary of the radical parties with some remembering the period of Nazi occupation and this is helping the case for a coalition government that will stick with the euro. If this happens, the market will respond positively, but vice versa applies, hence the importance of the poll.
That said, the European Union (EU) is worried about a standoff result and that’s why it has been trying to get Spain to request help for a bank bailout, which Spain did at the weekend. The Spanish leader, Mariano Rajoy, has had a shocker handling the banking fiasco, which has led to a local, well-known journalist suggesting a wax dummy of the PM shows more ability. “It’s hard to know which is the authentic one,” wrote Juan José Millás.
Others say he is “leading from the back,” but he is trying to prevent Spain copping the tough love – fiscal austerity – that the Greek Government got when it requested a bailout, which then led to the rejection of the national leadership. Rajoy would like the European Central Bank (ECB) to look after the banks, but the central bank thinks a bailout that includes the Spanish Government is required.
However, Standard & Poor’s think Spain’s banks will have losses of €140 billion by the end of 2013. And now the EU wants Spain sorted before the Greek election in case some damage control is needed.
Next to China where a slowdown is happening, which has prompted the central bank to cut interest rates by 0.25% for the first time in four years. Also, the latest inflation readings have come in better than expected with May’s reading at 3% compared to April at 3.4%. It was 6.5% last July. This coincides with slower industrial output, which was 9.6% against an expectation of 9.9%. The lower inflation gives China more scope to cut rates if needed.
Clearly China is affected by Europe’s plight, as Europe is the biggest customer for its exports. However, the Chinese have plenty of ammunition to kick-start their economy by the last quarter of this year.
Now to the USA where the euro-drama’s impact on the American economy is starting to worry Obama’s presidential re-election team.
The data has been mixed, but tending towards a slower economy than was expected three months ago. In fact, this week’s retail figures are expected to come in on the low side in May at 0.2% and economists are blaming the stubbornly high unemployment rate, which is now 8.2%, which would be a knockout figure for Obama if it does not improve soon.
Only last week Obama gave EU officials a gentle broadside telling them that cutting spending and excessive austerity was counterproductive. He recommended pro-growth policies. Luckily for the President, he has his central banker, Ben Bernanke, waiting and watching in the wings, and he will move on QE3 (quantitative easing three) if Europe gets worse over the next month.
The bottom line
Our best case scenario is that the EU’s €100 billion (A$127.76 billion) bailout of Spain’s banks restores confidence, followed by a good election outcome in Athens next Sunday; meanwhile, China follows the script of reigniting growth, which will mean there’s no need for the Yanks to print more money.
Of course, this wish list is no certainty and that’s why stock markets are so jumpy and will remain so until European leaders sort out their mess.
I think the last quarter of 2012 will bring better market outcomes for investors, but I’d love it to show up a whole lot earlier. We’re in the hands of those damn EU leaders again!
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