"The musical chair now stops at Italy"
That what happened after Greece issue. First IMF was asked to monitor Italy austerity meausres as it tries to bring down its debt. Next Italy PM lost majority support vote in Parliament and offered a conditional stepping down should Italy passes the austerity measures. Then yesterday Italian bond yield for 2, 5 and 10-years all rose above 7% triggering fear that Italy will be the next to bailout and question is can EU bailout Italy with its trillion euro of debt ? Too big to fail ?. That sunk stock markets globally.
Before getting into panic mode, need to analyzed why bond yield hit 7% can trigger such a fear ? Well for the past bailout by Greece, Portugal and Ireland, all having the same situation so history repeats itself or pure speculation that drive up the bond yield ? That remains to be confirmed.
News from Italy latest was that, Italy will have their first vote of the austerity package on Friday and by Sunday everything will conclude including current PM stepping down. Next question will be who will be the next leadership that will reform/restructure Italy ? That uncertainty definitely does not go well with investors who are already being panicked by the surge in bond yield.
Another news from Europe latest was that Germany and France are discussing possibility of trim down EU membership to stem out the current crisis. As such, countries like Greece, Portugal, Spain or even Italy might face the prospect of being kicked out of EU for the time being and rejoins once their own debt issue is being resolved. Restructuring the EU is definitely the best solution for it to stem out the crisis and the most likely candidate to get the boot will be Greece.
Rather than panicking now, investors should ask whether current events are being over-reaction ? EU debt crisis already existed for at least 2 years although there is not quick fix solution to end it but small positive step has been taking in the recent EU Summit and technical details of that plans are being penned out. On the other hand, US Fed has signaled the downside risk from Europe will affect US economy and is get ready to act with stimulus package. China's October inflation has cooled down to 5.5% and already started selective easing of monetary policies to spur growth. With inflation cooling and European debt crisis taking a dent to its economy growth, China will be also ready to act if the downside risk threatens its growth.
The bigger picture at the moment is problem in Europe still there, rest of the world know the downside risk if it is not controlled or resolved and are having plan in mind to stimulate their respective economy growth if there are being threatened.
The pull back in stock markets in reaction to events in Italy could be over-reaction or a form to "asking Italy to speed up its effort to solve its own debt". Before jumping into panic mode and pressing the panic button, investors should look at the bigger picture and analyze whether it is a case of over-reaction or storm is coming.
A quote from ex-ECB President Jean-Claude Trichet on mid-Oct “The crisis has reached a systemic dimension”. Global leaders know the risk and they are working hard to resolve it. Time is something they need.
Food for thoughts
"Mental strength, confidence and patience are the keys in winning in stock market"
