A long list of bad news

Turmoil in Europe and a Congressional supercommittee that's anything but super are taking a toll on global markets.

By Jim J. Jubak Nov 21, 2011 4:48PM

You’ve got your choice of bad news Monday -- and global stock markets have decided to react to it all.

The German DAX Index closed down 3.4%, London’s FTSE 100 closed down 2.6%, and the Standard & Poor’s 500 ($INX) was down 1.5% in afternoon trading. Overnight Hong Kong’s Hang Seng Index dropped 1.4%.

The bad news menu includes a complete lack of any progress over the weekend on even a temporary fix for the euro debt crisis. Rising bond yields for French government debt prompted Moody’s Investors Service to warn of negative credit implications -- that’s the step just before France gets put on credit watch with a negative outlook and that’s the step that then leads to a review and possible downgrade of France’s AAA credit rating.

Yields on Spanish 10-year bonds climbed to 6.57% as the new government of Mariano Rajoy, elected Sunday and due to take office on Dec. 13, failed to announce steps to reduce Spain’s budget deficit.

Italy’s bond yields were slightly higher at 6.72% because Mario Monti, Italy’s new prime minister of a week, had also failed to fix the Italian budget. The slacker.

(The European Commission’s warning to Belgium on Friday that its budget deficit violated European Union rules probably belongs in here although I suspect that the Belgian debt crisis -- How do you cut your budget deficit when you don’t have a functional government? -- is getting very little mind share today.)

Back in the United States, the markets seem shocked, absolutely shocked, that the Congressional supercommittee charged with coming up with a plan to cut the U.S. budget deficit is going to end in absolute failure this week.

The only good news I can see in this bad news is that it is so bad that it makes business as usual just about impossible. (Never say never when politicians are involved.)

Last week, the European Central Bank purchased nearly $11 billion in Spanish and Italian bonds and that barely kept yields below 7%. Now that the crisis is so clearly spreading to France even that isn’t likely to keep yields under control. So expect the beginnings of a barrage of plans to fix the crisis. (If this reminds you of the run up to the Nov. 3 meeting of the G20 leaders, it’s because it is almost exactly the same.)

Monday morning already brought a recommendation from a European Union study group to implement euro bonds -- not especially useful, perhaps, since creating euro bonds would require treaty changes that would take years to negotiate, but a sample of what is to come.

The financial markets were oversold on Friday and Monday they are becoming even more oversold. That process can continue for a while but gradually, as eurozone politicians put more and more plans in play and as financial markets remember that they never expected the U.S. supercommittee to produce anything anyway, the market’s oversold condition is likely to yield to yet another bounce.

It could be quite substantial -- on the order of October’s bounce -- since so many traders are short just about everything. Oh, and the bounce should get some help from projections of fairly strong U.S. economic growth in the fourth quarter.

The timing of the bounce will depend on when eurozone leaders succeed in putting something vaguely credible in front of the markets. The deadline for that is the Dec. 9 summit of European Union leaders.

What could prevent a bounce on a timetable that wouldn’t require sitting through weeks of pain? A failure to put ideas on the table that can generate any enthusiasm and serious plans by members of the U.S. Congress to revoke the automatic budget cuts that are supposed to go into action -- in 2013 -- if the super committee failed. Legislation to revoke those cuts would be enough to get the attention of the credit rating companies that are keeping an eye on the U.S. AA rating.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.

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congresseconomyeuropeJim Jubakpolitics

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