Tags: EU | euro | us | Summit

Little to Cheer, More to Fear After EU Summit

By    |   Monday, 12 December 2011 10:48 AM

I can’t get enthusiastic at all about the results of last week’s EU summit in Brussels.

After having downgraded the debt of three big French banks (BNP Paribas, Société Génerale and Crédit Agricole) on Friday, Moody's said that it will revisit the ratings of all European nations in the first quarter of 2012.

“The absence of measures to stabilize credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat,” Moody’s said.

Standard & Poor's already announced last week it is considering downgrading the debt of 15 of the 17 eurozone countries, including the bloc's Triple-A-rated nations like Germany and France.

So, Britain chose not to join the latest EU deal, which is its right to do, which is not considered as constructive in Brussels.

Also seriously disturbing for the EU deal is French presidential candidate (French presidential elections to be held on April 22 and May 6, 2012) François Hollande, who continues to remain the favorite.

He says that if he is elected next year, he would seek to renegotiate the eurozone deal that was agreed on at the Brussels summit last week.

In Germany, the president of the German federal lower house (Bundestag), Norbert Lammert, expressed his doubts about the measures adopted at last week’s Brussels summit to strengthen integration in the eurozone will be considered legal by Germany’s constitutional court.

And last but not least, it now has become crystal clear that ECB’s president, Mario Draghi, wants definitively to distance (with good reason) the European Central Bank from EU politics. It is good to remember that the ECB can’t generate growth and, as things stand today, the EU national governments can't either. So, application of austerity measures in countries with little or no growth at all is without any doubt an explosive mixture, especially within the EU.

The just released composite leading indicators (CLIs), which are designed to anticipate turning points in economic activity relative to trend, point to a slowdown in economic activity in all major economies. In Germany, France, Italy, the United Kingdom, India, Brazil, the euro area, as a whole, Brazil and India, the CLIs continue pointing strongly to economic activity falling below long-term trends.

The CLIs for the United States, China and Canada continue pointing to slowdowns in economic activity around long-term trends but with only marginal declines compared to last month.

So global growth continues to move in the wrong direction. And if all that wasn’t negative enough, a just released study by Deloitte (which is one of the Big Four worldwide accountancy firms along with PricewaterhouseCoopers (PwC), Ernst & Young, and KPMG) says that as a result of the stricter capital requirements, the banking sector will undergo an “unprecedented deleveraging process.”

The study estimates that European banks alone will sell off assets in the volume of 1.70 billion euros ($2.29 billion) of which 522 billion euros ($700 billion) will come from German banks.

Long-term investors should take notice that huge deleveraging can’t help economies as well as markets.

The OECD also warned that markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the eurozone and the global economy.

The OECD says that the gross borrowing needs of OECD governments are expected to reach $10.4 trillion in 2011 and will increase to $10.5 trillion in 2012, which is almost twice as much as in 2005.

The eurozone crisis is a crisis of confidence rather than debt, although debt is way too high to manage (the United States faces the same problem), the early signs are that last week’s EU summit will fail to restore stability.

Taking all this in consideration, here are some thoughts on different markets:

• I still don’t believe that anything seriously “good” can come out of Europe in the short term.

• As for the U.S., I wouldn’t be surprised by another significant bull move in the dollar that could easily result into a major top in 2012 before resuming its bearish trend in 2013 and 2014.

• As for gold and silver, to me the final bubble is still missing. Based on what we know today, the most likely time window for a potential bubble case could come in 2013 and 2014. In my opinion, I wouldn’t be afraid of buying more at any weakness.

• In the bond markets, I expect rising probabilities of a pull back, which translates in higher rates, somewhere during the first months of 2012 before a final down leg into a major 2012 yield bottom starts.

• On German bonds, I also expect a final blow off in the German bund.

Nevertheless, I can’t rule out that firstly in 2012 we could see further lower yields (higher prices) before in 2013 we could easily see higher in yields (lower prices), notwithstanding we’re heading into recession in Europe.

• Strategically equities are trading in a new cyclical bear market as part of a still intact secular bear market. Tactically we have a classic counter-trend/bear market rally underway as long as the S&P 500 (SPX) trades above the early October low at 1074. From a January low, we could see a final bounce into March before starting the next bigger bear market leg.

My preference form a long-term investor’s standpoint remains “risk off’ and therefore out of equities for the time being and until we see much lower prices.

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I can t get enthusiastic at all about the results of last week s EU summit in Brussels. After having downgraded the debt of three big French banks (BNP Paribas, Société Génerale and Crédit Agricole) on Friday, Moody's said that it will revisit the ratings of all European...
Monday, 12 December 2011 10:48 AM
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