The markets have entered a very dangerous environment in which even the usual market props (Fed Presidents calling for more easing) are being overridden by market concerns for Europe.
To whit, last week, not one, but two Fed Presidents (Yellen and Dudley), called for more easing/ QE. On the very same day (April 11), the ECB issued a similar statement regarding the potential for more easing.
At any point in the last 18 months, these sorts of statements would have kicked off a sharp rally in stocks. Instead, last week stocks posted a one day gain (the verbal interventions were on April 11) only to only to roll over again and close the week with their worst performance thus far in 2012.
This should be cause for major concern. As I’ve noted numerous times on these pages, the Fed has largely been engaging in verbal rather than monetary intervention since May 2011. Indeed, at one point I even facetiously noted that the Fed got more “bang for its buck” by having its biggest dove (Charles Evans) talk up stocks rather than money printing (QE 2 pushed the S&P 500 up 11% while various Evans verbal statements produced a 12% gain).
So, for the market to tank despite two Fed Presidents hinting at more QE (as well as the ECB engaging in similar comments) should be a major warning sign that selling pressure is creeping back into the markets in a big way.
With that in mind, this week is a bit of a toss-up. It is options expiration week, so we should see the usual upwards manipulation by Wall Street.
However, at the same time, the markets are waking up to the reality that Europe is about to enter its real Crisis (Spain) at the very time that European elections, particularly that of France, are favoring leftist socialist politicians who are completely opposed to fiscal austerity.
Indeed, the situation in Europe is fast approaching a confluence of factors (political, technical, fundamental, and economic) that has the potential for an absolute disaster to unfold in the next six to eight weeks.
For one thing, we have an Irish referendum, as well as Greek and French elections all in the next month. Any and all of these could go very, very wrong for the EU bailout gravy train.
Aside from this, most European markets are breaking down in a major way. These charts, particularly those of some of the PIIGS, are the ugliest I’ve ever seen… and that includes 2008. Whatever they’re predicting… it’s going to be horrendous.
And of course, we have the continued economic deterioration in the Eurozone. Greece has already seen an economic contraction of 17% making its collapse comparable to that of Argentina in 2001 (an situation that involved full-scale defaults, systemic collapse, and outright riots). Indeed, the “Greek issue” is far from resolved as I fully expect greater defaults in the future.
Far more disconcerting is Spain, which is already sporting unemployment numbers on par with those of Greece… and it only just began to implement austerity measures. Meanwhile the Spanish Government is trying to prop up the collapsing banking sector by forcing weaker banks to merge (how’d that work out for US financials in 2008?).
And then of course there is France, where hard-core socialist François Hollande is about to unseat Sakozy.
A few facts about Hollande:
- He just proposed raising tax rates on high-income earners from 41% to 75%.
- He wants to lower the retirement age to 60.
- He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.
All of these factors, combined with the end of the strongest seasonal period for stocks (November-April) as well as the end of Operation Twist 2 (June) have the making of a truly horrific period for the markets. Indeed, the mere fact that verbal interventions from the Fed are no longer working should tell investors point blank that things are about to get VERY ugly in the markets.
On that note, if you’re not preparing for the coming EU Banking Crisis, you need to get moving NOW. At most we have 6-8 weeks before it hits. And when it does, it’s going to make 2008 look like a joke.
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