Global markets basically rocketed up in the later part of the week after series of co-ordinated efforts to contain the spreading of the EU debt crisis. 6 Central Banks led by US Fed lowered its USD swap line by 50 basis points and extends that program till 2013 to provide extra liquidity to financial market to avoid credit crunch ( cheaper borrowing of USD ) together China's surprised bank reserve ratio cut of 50 basis points on 30th Nov 2011. This effort following EU leaders overtime working up measures ahead of the 9th Dec EU Summit to move another step towards resolving the debt crisis.
Firstly, looking at the development of the Europe region in its effort to resolve the debt crisis. Again, Germany has resisted what most investors want a joint Euro bond and bigger role for ECB to help to resolve the debt crisis. Presently, ECB role primarily is to stabilize the financial condition among Euro countries and its responsibility includes interest rate monitoring and purchasing of Government bonds to stabilize the Euro financial condition. EU has the EFSF as another mechanism to bailout or rescue Euro countries who are in trouble. A meeting among EU Finance Minister on 29th Nov 2011 has agreed on leveraging the EFSF ( to less than 1 trillion euro ) with possible help from IMF to bailout trouble nations. The technical details of that should be presented in the coming EU Summit on 9th Dec 2011. The next move by EU leaders led by Germany and France is to create a fiscal unions through treaty changes to have strict rules for Euro nations to achieve the required deficit target. The above 2 steps will not solve the EU crisis overnight but it will provide a very good foundation for further changes. Through the fiscal unions, Euro nations who probably wanting to still stay in the Euro will have to follow strict guideline in their deficit plan and avoiding situation of piggyback others to ride out trouble. EU at the moment is probably defying what most investors want ( a joint Euro bonds and ECB as a printing money machine ) and stick to the old traditional ways to resolve the debt crisis ie through strict austerity measures by debt nations to reduce the debt and undergoing restructure. Such traditional method is not a quick fix to the problem but a step by step pro-long period solution. A joint Euro bond at this time might not be the correct timing as with the debt crisis, the gap among the Euro nations has widen and should a joint Euro bond be launched now, it will nevertheless be a disadvantage to those stronger nations as the weaker ones might just piggyback to ride out the crisis. However, if the fiscal unions which was proposed by Germany and France is adopted and that should provide a good foundation for issue of joint Euro bond.
Secondly, US economy is another issue which investors globally concerned of. The stubbornly high unemployment rate in US is causing growth to be slowed apart from the impact from EU debt crisis. Despite the recent non-farm payroll data for November which saw unemployment rate drop to 8.6%, it is still a high figure by any standard and investors should not cheer about. US is in need of a job bill to create jobs to bring down the high unemployment rate. Without jobs, people will have no or less income to spend and that in no way can growth the economy of a nation. Another issue faced by US is its high deficit in which it needs to reduce. With the breakdown of the super committee tasked to work out a long term deficit reduction plan, auto deficit reduction mechanism is to be kicked in in 2013 to help reduce the debt but that is not a long term solution either. A long term deficit reduction plan is a must in the long run. Again political differences is the barrier to that. With EU debt crisis, most investors rushed to US bonds ( which considered a safe heaven ) but be ware of bond bubbles building up there. The logical question one need to ask is how come the bond of a nation with high debt be safe ? Should a bond bubbles burst in US, the impact of that can be catastrophic.
Thirdly, China the world number 2 economy in its November PMI signaled a slow down as figure came in 49%, first contraction since the 2008 crisis. Because of that, China started to cut bank reserve ratio too. Short-term wise, this could be worrying for China economy as we do not know of how serious the slow down will be or rather when will it bottom up. However, long term wise, this should not be of a concern as China has lot of room to loosen its monetary policy to combat the slow down. China should be able to reduce another 200 basis points in bank reserve ratio before interest rate cut and rolling out of stimulus package ( 4 trillion yuan in 2008 ) to support its economy. As such, short-term wise, China stock market might face pressure as company earning in term of revenue might be affected.
The fact of no quick fix solution to current crisis remains but each steps by the EU is in the right direction. Eventually, they will get the crisis totally resolve. As for stock market, in particular STI most analysts still will not commit that 5th Oct 2011 STI has hit the bottom. The closet was STI hit bottom for year 2011. Investors should keep the option opens that STI has indeed hit the bottom on 5th Oct 2011. Whether STI has hit the bottom on 5th Oct 2011 is important as it will determine whether one has the risk appetite to dip into the volatile stock market to buy on weakness. For investors who do not believe that was the bottom are advised to wait till 1Q 2012. Then investors should have a clearer view of how severe the EU debt crisis spiral into ( how deep the recession EU is in if it does get one ), how much impact of the EU debt crisis has on rest of the world in particular US and China. Should conditions render, Central Bankers should be able to launch stimulus package to support their respective economy.
There is something investors should also keep a look out for. This month is the last month for year 2011, from the look of it, most funds are overweight on bonds ( in particular US bonds ) and underweight in equity and if Europe keeps on making the correct and positive noise from now till year end, stock markets could move higher due to short-covering domino effect and as such for funds who typically benchmark their performance to the index will have to force to buy into stocks to avoid being underperform for 2011. Should such a scenario occurs, the index will just keep on moving up towards year end.
Food for thoughts
Market will always reward those with ultimate holding power and patience
