• Investing & Markets

Weekly Market Digest – Week Ending 11/18

November 18, 2011 | Craig Birk, CFP®

Continuing the recent theme, fear of European sovereign debt contagion caused selling pressure while most US economic news was encouraging. Overall, stock prices were down. Spain joined Italy in having to pay near 7% yields on new debt, and rating agency Fitch spooked investors by suggesting US banks may be at risk of European bond exposure.

Major Events

  • Monday – UniCredit, Italy’s largest bank, announced plans to raise 7.5 billion Euros in capital by selling shares.
  • Monday – Japan’s GDP surged at an annualized 6% rate, as exports recovered from a post-earthquake slowdown.
  • Wednesday – Fitch Ratings said further contagion from Europe’s debt crisis will pose a risk to American banks. Stocks fell on the release.
  • Thursday – Spain’s auction of 3.5 billion Euros was met with tepid interest, forcing the country to pay 6.975% on the new debt.
  • Thursday – Applications for jobless benefits in the US dropped to 388,000, which was significantly lower than expected.
  • Thursday – US building permits jumped 10.9%, ahead of expectations.
  • Friday – The US Conference Board’s leading economic indicators index rose 0.9%, ahead of expectations.

Our Take

Not at all surprising, Spanish and French debt yields crept higher. This prompted calls from numerous politicians and pundits for the ECB to assert itself more forcefully in stopping contagion. Germany, because of inflation concerns, continues to resist the idea of the ECB printing Euros to buy government debt. However, there seems to be no other alternative. As the ECB becomes the focus of attention, Germany will find it difficult to play the role of spoiler if the rest of the continent is slipping into insolvency.

When the ECB announces it will buy unlimited debt (presumably temporarily until governments can get their deficits under control and the private market comes back), it will release a lot of pressure on stock prices. We would not be surprised to see this happen before the end of the year.

Given that the US and Britain have already taken similar measures, the world could be awash in newly printed money. This means investors should be pondering the impact of higher inflation. But there is time. If inflation comes in force, it won’t be in the next few quarters because credit markets are still very sticky in the midst of so much uncertainty.

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