Europe Talks Come Down to the Wire
The market finally had a major pullback yesterday. As the day started, it looked like the session would be another example of where the indices are down in the morning then blast positive into the close. But the bears stayed strong, defended 1250 resistance, and brought the indices back down by 2%.
The bears managed to defend resistance yesterday but once again, volume wasn't above average. And yet again, the banks provided leadership, albeit to the downside.
Financials have clearly driven this rally. And it makes sense - this rally is being built on a bailout designed to help banks.
Earlier this year, in July and August, the big bank stocks (and some insurance) cratered lower as investors feared default in Europe. Banks have exposure to nations that are likely going to default (if they were a person they would have already defaulted two years ago).
When a default occurs, the bank only receives a portion of the money lent out. And that bank is also forced to take a net income loss.
That's the most basic reason why the bank stocks sold-off in August. But another aspect of a default is a reduction in spending, austerity. And as government and municipalities reduce spending, economic growth slows.
While debt reduction is a noble process over long periods of time, the fact is, it will result in slower growth for that economy.
In a slow economy, employment goes down and so does spending, which are two other big components to a healthy banking system.
The unemployed are less likely to pay existing debt, and a slowdown in spending will also correspond to a reduction in loan demand. While the European bailout must certainly help reduce countrywide default, it also needs to foster a healthy economic environment. And the ECB could help too, if it were to lower interest rates.
The expectations have dampened ahead of the announcement about Europe, which will happen today. Additionally, earnings continue to be mixed, some strong, some weak. And economic data continues to be more good than bad.
The results themselves are not particularly strong, but much like today's U.S. durable goods orders for September, results were -0.8%, but they beat expectations of -1%. The bulls still have control of the trend, but the bears will have their chance to take it back today. Investors are willing to forgive a lack of specific dollar amounts regarding the bailout plan, but they will want a timeline and broad strategy.
