The recent performance of equity and commodity markets has shown that investors are currently skeptical. The positive gains seen in the markets last Friday, based on the EU summit, have slowly withered away. Tensions related to Iran and the temporary détente brokered, the markets have focused back on the indices and their doubts have reverberated in all markets since then.
Last week saw crawling gains in the equity markets which were soon extinguished by the fall in interest rate of only 25 basis points, on Thursday, to 0.75%, the lowest ever in European history. This was foreseen by the Asian and European markets before hand, while the commodity markets also showed their discontent with oil and gold both falling in the session that followed the announcement. The investors felt that there was a larger stimulus required and the cut should have had been bigger.
The expectations of a gloomy economy were on the cards due to the urgency of the EU summit and on the economic data coming out from Asia, Europe and America before the announcement. The calls for more drastic measures gained momentum on Friday when the US released its employment data. Unemployment held steady which signalled to a slow down that, even though most investors do not want, but are expecting. Now sights are set on the meeting of Federal Reserve where investors are hoping for a third round QE to provide a much needed boost to the faltering economy.
Today sees the meeting of the European finance ministers to discuss the European crisis at hand and to adopt the measures that have been put forth by their leaders in the recently held EU summit. The meeting comes at the back of the euro falling to a new time low which should signal the dissatisfaction that the markets feel with the efforts being done by the leaders. To add to the woes, Chinese Premier Wen Jiabao has said that there are downward pressures on the economy and that recovery is still underway so there are tougher times ahead.
The meeting today is more likely to highlight the problems that are being faced by Italy and Spain and the restructuring the debt for Greece. The individualistic focus is being prioritised over policy making for the whole region. In addition, the interest rate cut on Thursday was seen as a step backward rather than forward. The cutting of borrowing costs for only Spain and Italy was myopic when it would have been better to cut the benchmark rate altogether.
The Italian and Spanish premiers have already raised concerns over the plan of action that is being followed by the region. They point towards a lack of urgency by all parties involved to reach a common ground. Stronger economies, like Germany and Netherlands, want to put harsher and more stringent controls to the bailout being provided while distressed economies are trying to gain any advantage they can in order to get the required liquidity without making any promises they might not fulfill in the future.
Financial markets seem to be looking ahead rather than lagging the economies and their performances and it seems that they are passing their own verdict on the solutions being put forth. The trend currently suggests that investors are pointing to harder times ahead and until there are radical measures taken, the markets would fall further before an uptrend starts. Matters have been made worse with a lack of united front presented in Europe and the political backlog that has to be negotiated is taking its toll on the markets.
There is still an optimism that seems to be the spillover from the EU Summit in addition to the proposals that were given. The EU Summit showed for the first time that the different parties were willing to give away a part of their agenda in order to come together under the bigger umbrella of common interest. The sense of sanguinity is a little jaded after the dismal jobs report and economic outlook given in last week; still the finance ministers feel that the EU Summit was one of the stepping stones to the road to recovery. The deadline given for the implementation of the proposals was given as 9th July and so it has to be seen how far the ministers are willing to go today in lieu of the proposals.
Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.