Archive for April, 2012

So goes Europe, so goes the DOW!

A string of disappointing developments in Europe put heavy pressure on global markets Monday morning.

In recent trading, the Dow was down 150 points while major bourses in Germany and France were off by nearly 3% as Europe’s crisis completed its migration from the back burner to the forefront of the market’s consciousness.

Last week, financial markets became fixated on Spain’s debt crisis and then turned to focus on French elections heading into the weekend.   But it was developments in the Netherlands, where budget talks broke down this weekend, that really unsettled the markets.

Next to Germany, the Netherlands was considered “the cleanest country” in the EU in terms of its fiscal discipline, says Sassan Ghahramani, president and CEO of SGH Macro Advisors. “The triple-A of triple-A is now having a big dogfight over the budget. They may put a budget together but the government is going to fall apart.”

Indeed, Dutch Prime Minister Mark Rutte said new elections were an “obvious scenario” after budget talks ended and Rutte’s government lost the support of the right-wing Freedom Party, led by Geert Wilders. The Freedom Party opposed Rutte’s plans to bring the country’s deficit toward 3% of GDP. The risk for financial markets is Netherlands losing its AAA rating.

In Europe, right-wing parties tend to be extremely conservative on social issues, like immigration, but not necessarily what Americans think of as “conservative” on fiscal issues. These parties are “very anti-bank, anti-establishment,” Gharamani says.

Right-wing politicians in the Netherlands and France, among others, have been critical of the EU and are pushing back against the austerity measures agreed to in the EU Fiscal Compact Treaty. The compact, which was approved in January, obliges EU members to keep budget deficits below 3% of GDP and keep public debt at 60% of GDP.

“Northern countries are drifting away from the fiscal austerity they’re preaching to southern countries,” Ghahramani observes. “That’s an issue people are concerned about.”

Right-wingers, led by France’s Marine Le Pen, also fared better than expected in the first round of France’s presidential elections this weekend. That could pressure President Nicolas Sarkozy to mollify his support for the EU Fiscal compact as he heads into the second-round match up on May 6 against Socialist Francois Hollande, who is leading in the polls.

“Maybe people are finally realizing ‘Oh my god, we’re going to have a socialist in place’ but the surprise [in France] is the showing of the far right and the weak showing of the far left,” Ghahramani says.

But France’s election and the potential end of Sarkozy’s reign was on the market’s radar, he says. “Holland is just beginning. The problem there is the coalition led by liberals has now fallen apart. It’s an anti-euro type movement.”

Germany’s Angela Merkel faces similar pressures at home, even as her government is pushing for more austerity elsewhere in Europe. Merkel’s party is expected to lose support in local elections on May 6 in North-Rhine Westphalia, Germany’s largest state.

In the end, Ghahramani believes the rising anti-euro sentiment will cause changes in the domestic policies in various nations, rather than an “overhaul” of the EU itself.

Still, the political trends will complicate policymaking in the EU, which is concurrently facing a sharp slowdown in economic activity. Also Monday, dismal reports on German manufacturing and Italian consumer confidence reinforced concerns about the eurozone being in recession. Speaking of which, Spain’s central bank said its economy contracted for a second straight quarter, the conventional (albeit flawed) definition of a recession.

“Even as you’re fixing problems on the budget the real economic problem is starting to hit,” Ghahramani. “You’re getting a bigger hole to dig out of, which might even be a bigger problem than dealing with policy,” which is heading in a direction antithetical to the bulls.


Categories: Economic Update

Market Recovery? NOT!

U.S. Economy Could Stay “Pretty Miserable for Another 5 Years: Martin Wolf

By Morgan Korn | Daily Ticker – 22 hours ago                   


Economy started the first quarter off strong: there were a few blips in the data but the recovery looked robust and markets reached levels not seen before the crisis. But a string of weaker-than-expected economic reports in just a few short weeks have caused a growing number of investors and economists to question whether the economic rebound has stalled.

Martin Wolf, chief economics commentator at The Financial Times, says the economy continues to face massive headwinds.

“My view throughout has been that we were going to have a very weak, very uncertain, very inconsistent recovery in all the developed countries,” he says in an interview with The Daily Ticker. “The U.S. can continue to grow, but it’s going to be disappointing growth. I’ve always thought [the recovery] would be a 7-10 year process from the start.”

Wolf supports bigger fiscal deficits and more expansionary monetary policy to speed up and bolster anemic economies. But governments around the globe are choosing austerity over additional stimulus and he acknowledges that monetary policy, at least in the U.S., is at its limits. China‘s domestic expansion has greatly outpaced Western nations over the last few years, but even China cannot sustain its rapid growth much longer, Wolf says.

“The real engines of the world economy really aren’t really very strong,” he notes.  The U.S. may be lucky enough to slip past recession but Wolf expects the Eurozone will contract this year if it’s not already in recession. While there are bright spots for the U.S. economy — net exports and consumer consumption — they’re not enough to pull the U.S. out of its dismal economic situation, Wolf says.

“If you look at the underlying dynamics of the economy — consumption, investment, exports, government spending — they are going to be weak and uncertain,” Wolf adds.

“I expect the U.S. to have a pretty miserable few years, and I think that will be true for whoever wins” in November.

Categories: Economic Update

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Europe is still very shaky!!!

Martin Wolf: Europe Is Facing

“A Very Significant Moment”

After a brief reprieve earlier this year, Europe’s financial crisis has returned to the forefront of the market’s consciousness.



Following a week where Spain was top of mind, this weekend brings two additional events that could have major ramifications for the future of the EU: The IMF/World Bank meeting and the French presidential elections.

In the accompanying video, I discuss these developments with Martin Wolf, chief economics commentator at The Financial Times and one of the world’s foremost financial journalists.

Of the two events this weekend, Wolf says the French elections are more important for financial markets.

“It’s potentially a very significant moment,” he says, citing current polls showing Socialist Party candidate Francois Hollande leading French President Nicolas Sarkozy in an anticipated second-round matchup. (Sunday is round one, with the top two vote-getters moving on to a second-round runoff on May 6, assuming no single candidate gets 50% of the vote in round one.)

As a candidate, Hollande has called for a top marginal tax rate of 75%, publicly chided the European Central Bank to do more to spur growth, and said he would seek to renegotiate the EU Fiscal Compact Treaty. The compact, which was approved in January, obliges EU members to keep budget deficits below 3% of GDP and keep public debt at 60% of GDP.

Should he win the presidency, Wolf believes Hollande will “come into line” and move toward more centrist policies. “But there could be quite a bit of excitement on the way and the eurozone really could do without more excitement than it already has,” he quips.

Particularly “exciting” would be the not-unthinkable possibility Hollande’s government would need to form a coalition with the Leftist Front party, whose standard-bearer Jean-Luc Melenchon is currently polling at around 20%. Melenchon wants to abandon the Fiscal Compact altogether and impose a 100% tax on earnings above $480,000. (And you think there’s class warfare and populist rhetoric in American politics?)

Should Hollande embrace such policies “it could lead to a crisis in the French bond market,” which could become “unmanageable,” for EU policymakers, Wolf says.

The good news is Wolf believes this worst-case scenario will be avoided and more broadly believes the euro will survive, describing the EU as a “miserable marriage” that will nevertheless endure.

The other news is Wolf expects IMF chief Christine Lagarde will get her request for at least $400 billion, which would double the fund’s lending capacity.

Wolf supports the idea of the IMF having a larger insurance fund, so countries won’t need to hold as much currency reserves but thinks it should be more global in nature.

“To put it all into Europe? That looks to me like a very dangerous game for the IMF,” he says. “They’ve made quite clearly some serious mistakes getting so involved in a political project they don’t really control.”

Categories: Economic Update


President Obama Targets Oil Speculators:

Another Election Ploy?

By | Daily Ticker – Tue, Apr 17, 2012 1:33 PM EDT

President Obama today raised the ante on his efforts to limit the rise in oil prices. The president, joined by Treasury Secretary Tim Geithner and Attorney General Eric Holder, called on Congress to adopt tougher rules on speculators in the oil market.

“We can’t afford a situation where some speculators can reap millions while millions of American families get the short end of the stick,” President Obama said.

The president’s $52 million proposal would stiffen penalties for firms found to manipulate markets and raise the amount of money traders would have to put up to back their positions. It would also beef up the enforcement staff of the Commodity Futures Trading Commission and increase spending on technology to oversee and monitor energy markets.

The Daily Ticker’s Henry Blodget says the proposal is “embarrassing” because speculators have little to do with the rising price of oil and gasoline. Prices are moving higher, Henry says, because “three billion new capitalists” in India and China are consuming oil and gasoline. It’s the balance between supply and demand that determines whether oil prices rise or fall, not speculators, Henry argues.

The International Energy Agency and the U.S. Energy Department both reported last week that global oil supplies are loosening even with Western sanctions on Iranian oil. Saudi Arabia and other producers are increasing output which has helped to put some downward pressure on oil prices. Oil is trading higher on Tuesday afternoon.

Categories: Economic Update