Investors who spent August on the beach were fortunate to miss a bout of roller-coaster trading. And they will be rested for the next round, a taste of which came on Friday. The concerns behind the last volatile patch still have not been addressed.
European debt trouble, the weakness of economic growth in the United States — underlined by the zero jobs created in August — and political conflict spell more wild rides.
Out of 45 developed and emerging stock markets tracked by S.& P. indexes, August left all but two underwater, by an average of 7.7 percent globally. Anyone who packed up at the end of July, sold stocks and bought Treasuries can at least count themselves lucky. After all, even those who stuck around for live deals have seen initial public offerings abandoned and one huge merger deal, AT&T’s $39 billion purchase of T-Mobile USA, put in jeopardy.
But returning players shouldn’t forget that, at the end of August, 44 of those same 45 markets were also still down from the end of August 2008 (the exception is Peru’s). Then, the collapse of Lehman Brothers and the worst of the crisis was still in the future, but by only two weeks. A lot can go wrong.
The euro zone remains a basket case — at least in places. That is belied by its currency, which has remained remarkably strong against the dollar at around $1.42. Yet shaky sovereign debt tucked away in the region’s banking system makes it the biggest potential flashpoint for global markets.
The crisis has moved well beyond Greece. There is a metaphorical bull’s-eye on too-big-to-rescue Italy. In August, 10-year Italian bond yields soared above 6 percent before the European Central Bank stepped in and agreed, reluctantly, to buy Italian debt. Italy has to refinance a record 62.4 billion euros of debt due for repayment in September, and that could put the central bank’s calming influence to the test.
And there is still a question over European bank financing. In August, fear erupted again about the banks’ access to short-term sources of finance like United States money market funds. The funds are still lending, but for shorter periods. The shorter the term of lending — and it can get down to day-by-day — the easier it is for the funds and other lenders to pull out, leaving European banks to scramble.
Between Europe’s sovereign debtors, its banks and its currency, there is a credible systemic threat. And despite the ray of hope for private sector answers provided by a Greek bank merger in the last days of August, no one has come up with a comprehensive plan to right the European financial ship.
Meanwhile, worries over a double-dip recession in the United States are overshadowing earlier concerns about a slowdown in global growth. Chinese expansion has held up so far, though its policy makers face the challenge of maintaining that expansion while trying to cool parts of the economy and control bank lending. But for America, the latest gloomy data point was the stark jobs report for August, released on Friday.
The Federal Reserve on Aug. 9 pledged to keep short-term interest rates near zero for at least two years, and it looks as if the central bank, led by Ben Bernanke, is weighing round of quantitative easing. Any new measures are sure to be contentious. With three Federal Open Market Committee dissents over the low-rate promise last month, Mr. Bernanke and his colleagues have plenty to debate. This month’s meeting, now extended to run Sept. 20-21, will be scrutinized closely by investors.
Mr. Bernanke referred in an Aug. 26 speech to a third big theme for markets: the seeming inability of Washington’s political leaders to agree on anything. Such dysfunction played a part in Standard & Poor’s landmark downgrade of United States debt at the end of July. And President Obama and Republican leaders even managed to bicker over a date for Mr. Obama to tell Congress about new job creation ideas, an event now set for Thursday.
But America isn’t the only place with a political credibility problem. Europe’s leaders, including Angela Merkel of Germany and Nicolas Sarkozy of France, are struggling for a way to escape from the region’s debt troubles. That is partly because the disparate interests within the euro zone make it difficult to force weaklings like Greece to take austerity medicine, and just as tough to persuade the bloc to help out. With politicians everywhere as well as markets floundering, investors could be in for a bumpy ride.