By Markos Kaminis
The end of the week’s global market demise had plenty good reason why investors might head for the door. On any given day there are a slew of reasons why stocks and the broader market might rise or fall, so looking across the globe for a common denominator can be difficult. However, we’re relatively confident we’ve identified the culprit for you.
After taking back significant ground at the close Thursday, the Dow (NYSE: DIA, NYSE: DOG) was still down 0.5% and the S&P 500 Index (NYSE: SPY, NYSE: SDS) was short 0.3%. The slide in American stocks followed declines in Asia and Europe. After searching for drivers, I lean heavily towards Europe this time, given its degree of decline versus Asia. If the declines were equal between Asia and Europe, I would have pinned President Obama with the blame, and considered that his statement Wednesday evening with regard to nation building at home (versus in Afghanistan) took away a degree of certainty global markets have grown quite used to regarding the United States’ willingness to police the world. However, it looks as though this was not the case, despite my feeling that it should be considered overseas. We have evidence of it in Libya and now Afghanistan.
Given that the decline started before American markets opened, we can rule out the possibility of new labor market data in the U.S. driving it. Weekly Initial Unemployment Insurance Claims increased by 9K in the latest reported period, taking new benefits filers up to 429K. That certainly didn’t help matters, but it is not the source of the week’s demise either.
Thus, the day’s dastardly driver must have originated in Europe, and we can be fairly certain of that thanks to the decline of the euro as well. Europe’s most significant market moving news derived from the European Banking Authority (EBA). The EBA warned area banks to be more realistic about their Greek debt holdings. In other words, most of Europe’s financial institutions with exposure to Greece have not accounted adequately for the possibility of a Greek default. You can bet they have not even pondered a Portuguese pitfall.
The EBA will be announcing results to its latest stress testing of 91 European banks around July 13. The regulator said it had given its banks guidance to “address inconsistencies and excessive optimism” on sovereign exposures. If that did not feel like a slap to the face, we suppose European investors might still have gotten it when they reached home that evening to their portfolio perusing wives.
The EBA test will consider how its banks might fair through a two-year recession. What’s new about the situation is that previously European politicians and also regulators like the EBA have not even given sovereign default a note of consideration. Given the latest uproar around the release of the current tranche of support to Greece, and debate about how well Greece is managing austerity (you should be envisioning rioting now), it would seem default is becoming digestible among despots. Its repercussions had neither been accounted for completely by trusting investors, and so the day drew market ire and capital withdrawal. More bad breath was borne from the mouth of the European Central Bank head, Jean-Claude Trichet. The ECB chief raised alarm in Europe when he said financial stability for the region was “flashing red.”