All’s Quiet on the European Front: No News Is Good News…For Now
The headlines coming out of Europe this weekend were not particularly positive for those hoping for major new policy action to deal with the crisis.
German Chancellor Angela Merkel once again rejected calls for a euro-bond, something U.S. policymakers and many in southern Europe are agitating for. “Under no circumstances” would Germany agree to euro bonds, Merkel said in a speech to members of her party, the Christian Democratic Union, in Berlin Sunday.
Meanwhile, German and Spanish officials are bickering over whether or not the Spaniards should take a bailout to rescue their struggling banks. Prime Minister Mariano Rajoy called for a “banking union” in Europe, i.e. some kind of centralized mechanism to recapitalize banks, another idea rejected by Germany.
“It’s up to national governments to decide whether they want to avail themselves of aid from the [existing] backstop and accept the conditions linked to it, and that of course also applies to Spain,” Merkel’s chief spokesman Steffen Seibert said in a Bloomberg report Monday.
The biggest news out of Europe this weekend was a speech by George Soros. Among other things, the legendary financier said the European Union is “like a bubble” — albeit a political vs. financial one — and predicted EU “authorities have a three month window during which they could still correct their mistakes and reverse the current trends.”
After Friday’s big sell-off, some feared a resumption of the rout in equities, even a crash on Monday, if there was no big policy announcement out of Europe.
But despite the lack of any real progress and a big sell-off in Asia, European markets were mixed — featuring a big up move in Spain — and U.S. stocks were down just a hair early Monday.
“Everyone is pinning their hopes on the idea they’ll see some sort of master plan” emerge, says Todd Harrison, CEO and founder of Minyanville.com.
The next EU summit is scheduled for June 28-29 and there is a lot of chatter about a “secret” meeting this week. In addition, the ECB meets Wednesday amid hope the central bank will take more aggressive action to address the crisis.
But Monday’s relative calm is in no way a sign the storm has passed, Harrison says, suggesting the S&P could fall to as low as 1200 in the near term.
“If you can get that real capitulatory whoosh down,” stocks would then be attractive, he says, suggesting Friday’s big decline does not qualify. “Not with the VIX at 25,” Harrison says, noting the so-called fear index hit 50 last August.
Stocks for the Long Run? Not in Japan
Notably, these are all short-term calls from a traders’ perspective. For a truly long-term view, check out Japan, where the Topix Index – a broad measure of local stocks — hit a 28-year low on Monday.
Reflecting on the latest grim news from Japan, Harrison cites the work of Minyanville.com contributor Peter Atwater, who writes that the duration of a downturn is sometimes more important than the depth.
“Anyone can hold their breath for a minute when they’re 10 feet underwater but a man can drown in six inches of water if he’s face-down long enough,” Atwater writes.
With the U.S. economy struggling to sustain any forward momentum, and stocks currently at 1999 levels, this is what’s so disconcerting when people warn about America following Japan’s path.
Will Congress get anything accomplished before the November elections?