By: Dr. Mike Campbell
The European debt crisis seems to have become a fixture of the landscape. It could also be that it has finally been factored into the markets; to a large extent, it had been the “obvious elephant” for quite some time before the Greek situation focussed minds on it.
As we saw in yesterday’s trading review for May, the European markets finished both the month and last week at higher values than they had started; Japan lost substantial ground (5.8%) over the month and America also trended lower. This data tends to suggest that the decline of the Euro has been factored into European markets.
A weaker Euro is good for Eurozone exports and it the export market is a major factor in the European recovery. European markets fell because of concerns that Greece might default on its loans; despite an IMF/Eurozone borrowing facility. When a very substantial financial provision was put in place to help other Eurozone countries that find themselves in difficulty, initial market sentiment was strongly positive, but the mood didn’t last long.
The strengthening of European markets may be due to the fact that stocks look cheap now, given the clear determination of Eurozone countries that the currency will be protected.
On Friday, Fitch, a credit rating agency, downgraded the credit worthiness of Spain from AAA to AA, suggesting that whilst still a very reliable place to invest, the risk associated with Spanish bonds had gone up. The decision did not produce a wave of panic selling of the Euro which strengthened against the Yen (from an 8 year low) although it is still falling against the Dollar and a strengthening Pound. Spain narrowly passed austerity measures designed to reduce its sovereign debt problems. It will also need to take measures to bolster employment which is at the lowest level within the EU.