Risk is Rising Whilst Austerity is Failing

Published by Filipe R. Costa on Wed, 03/10/2012 - 09:40
austerity meeting

Daily Market Commentary for October 3: US markets closed higher, with the exception of the Dow, on a volatile session with many ups and downs. QE Infinity is giving a boost to equities but fears about Spain and the starting earnings season don’t allow for much upside.

Investors are very anxious about Spanish prospects. They are waiting for the country to ask for a full bailout but it seems that Mariano Rajoy and even Angela Merkel don’t want that to happen, at least for now. A formal bailout would allow Mario Draghi to start the promised bound-buying program but, one month later of his announcement, the program has still to wait.

Austerity measures aren’t leading anywhere. As we saw a few days ago, in Portugal, the government wasn’t able to reduce its debt-to-GDP ratio even after implementing very tough measures in the country. The results were disastrous with budget levels not being accomplished as tax revenues reduced due to a drop in economic activity, GDP was deeply negative and unemployment is now at 15.9%. Greece is not in a better situation. Debt-to-GDP will rise to 180% next year whilst GDP growth is expected at -3.8%, marking a sixth consecutive drop.

The ECB and EU officials may set rescue packages to keep this boat afloat but we may conclude that austerity failed and the insistence on this kind of program will just lead the European boat to  ultimately sink. Markets are undecided for now but I’m not really positive on the near future, mostly due to Europe not being able to save itself. Adding to this, the US economy is not high-flying and a recession is not out of the cards, unfortunately.

Overnight, China and Australia reported weak data again. The services sector in China saw a drop in activity and the trade numbers in Australia showed weaker demand for commodities exports, clearly signalling a cooling in China, as the main importer of Australian commodities. markets are a little cautious right now, with the Dow edging down to 13,460, the FTSE to 5,793 and the Euro sitting at 1.2900. The next developments in Europe will be crucial, especially tomorrow’s ECB meeting. let’s wait for Mr. Draghi and see what he has to say this time.