Let down again
May 27th, 2010
Last Friday saw the FTSE 100 briefly slide below the psychologically significant 5,000 mark – a downbeat end to a volatile week. And, this time, we really can blame the politicians. Markets are spooked by the uncertainty in the eurozone and are beginning to fear for its future. Should the crisis in Europe be having such a profound impact on markets? After all, the bailout went through the lower house in the German parliament, Sarkozy has stopped stamping his feet and Greece has secured a great fat wodge of cash to protect itself from bankruptcy. However, markets are looking beyond the immediate bailout and the basic question of whether Greece will default on its debt or not – specifically, they are looking at the cash this would draw away from the recovery in the eurozone. Germany is not comfortably out of recession by any analysis, France is doing better, but its strength is also not assured. Bailing out Greece may be a financial commitment too far. The eurozone is the world’s largest economy and any weakness in its recovery is bad news for global growth. Another problem is that the bailout for Greece is fundamentally anti-capitalist. It is throwing good money (Germany’s, France’s) after bad (Greece’s). Greece is a far less competitive economy. Less global growth will be generated from saving Greece’s hide than if the money were, for example, reinvested in German domestic projects. Or so markets believe. Then there is the unwanted governmental tinkering in market structures – Germany’s short-selling ban, the regulatory threats to the banking sector and other meddling. It is adding yet more unpredictability to what is already a very unpredictable situation. Markets are behaving like slightly disappointed parents. They had just thought that the global economy could be trusted and would behave responsibly when it let them down again. The reaction does seem disproportionate, but it is important to remember all the hope that went before it. Most market observers suggest there is none of the wholesale dumping of stocks that might characterise a bear market. There simply aren’t a lot of buyers around. And who can blame them? It is difficult to find a compelling reason to buy in the current market. For the time being, volatility is likely to be the order of the day. The UK stock market may gain some positive momentum when the new Budget is announced in June if clear deficit reduction measures are made, but volatility is unlikely to abate until the situation in the eurozone becomes clearer. Independent Financial Advice, please contact Mark or Clare at GMP Independent Financial Advisers LLP on 0207288 6400.