Thursday, August 18, 2011

Icky Morning as Europe 'Matters' Again

As always, it is a bit bemusing when a news item has not gone away (did Libyan turmoil ever go away? no, but suddenly it does not matter for oil since its not headline news), but the market forgets about it.  After a three day rally up thru Tuesday, with hopes of some magic silver bullet out of Sarkozy and Merkel,  the market has been choppy the past 2 sessions - although still mostly ignoring Europe.  Today?  Not so much.  Futures are down sharply (near 2%) as Europe indexes are being hit hard (2.5% to 3.5%) - led by the banks.  CNBC is reporting (ironically) that without the ability to short financials in countries like Italy and France, traders are turning to Germany equities. 

Technically, the S&P 500 broke over that 1175 level the past 3 sessions, but did not make much headway over 1200.  This morning's gap down should take us near or below that 1175 level.  If the market stays there, we're looking at that range of last week between 1120 and 1175.  Obviously the rally helped work off a massive oversold condition.

Also this morning, the WSJ is reporting that U.S. regulators are stepping up scrutiny of local operations for Europe’s largest banks on concern that the region’s sovereign debt crisis may lead to funding problems.

Morgan Stanely yesterday slashed sharply its global growth forecast for 2011-2012 saying U.S and Europe are 'dangerously close to recession'.  This comes the day after Europe's largest economy, showed 0.1% growth in Q2 GDP.  France reported 0.0% last week.

  • It said it now sees growth in developed market economies averaging only 1.5 percent this year and next, down from his previous view of 1.9 percent and 2.4 percent, respectively.
  • Growth in emerging market economies will slow to 6.4 percent this year from 7.8 percent in 2010, Fels estimated.
  • This means that emerging market economies — which now account for half of global GDP — will generate 80 percent of the global GDP growth that Morgan Stanley is forecasting for 2011 and 2012, Fels said.
  • If the West does slump back into recession, or a prolonged period of meager growth, analysts say China may not be in a position to reprise its role in supporting the global economy as it did in 2008, when it announced a massive stimulus program.  Inflation unexpectedly quickened in China in July, putting pressure on the central bank to keep prices in check with more interest rate rises even as its robust growth showed signs of cooling.
  • "Our revised forecasts show the US and the euro area hovering dangerously close to a recession — defined as two consecutive quarters of contraction — over the next 6-12 months," Joachim Fels, who co-heads Morgan Stanley's global economics team, said in a research note dated Wednesday.
  • That was not the bank's base case scenario, he said, noting the corporate sector still looked healthy and lower inflation will ease pressure on consumers' pocketbooks, while central banks such as the Federal Reserve and European Central Bank could try to loosen policy further.
  • Still, "it won't take much in the form of additional shocks to tip the balance," he added. "A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US."

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