December is often a good month for stocks, says Brendan Conway in The Wall Street Journal. But markets have “never met a sovereign debt crisis like this”. As it intensified last week, global equities were hit hard. Before an uptick this week, Britain’s FTSE 100 had lost 8% over nine days – its worst run since early 2003.
And the outlook is hardly encouraging. Indeed, “the risk that the single currency disintegrates within weeks is alarmingly high”, says The Economist. Germany is loath to let the European Central Bank end the panic by printing money to buy peripheral debt. Neither is it keen on jointly guaranteed eurozone bonds to ease pressure on indebted states.
So Europe lacks a firewall, while it is also sliding into recession amid austerity and a credit crunch in the banking sector. The downturn will make investors, already fleeing from eurozone assets, even less confident that peripheral states can cope with their debt, particularly as it is likely to “feed popular opposition to austerity and reform” and thus raise fears of default.
There are various potential triggers for a disintegration of the euro, adds The Economist. A failed bond auction that forces a country into default and “sends a shockwave through the banking system” is a distinct possibility – note that Italy has to refinance over €80bn in January and February. A country could refuse to swallow yet more austerity and thus declare itself bust. Or a run on a bank could cause panic across the continent, given how much sovereign debt the sector holds. “The odds of a safe landing are dwindling fast.”
Europe apart, investors have other problems. China last week released the worst manufacturing figures in over two years, stoking fears of a hard landing. In the US, the failure of the supercommittee to agree a budget suggests that payroll cuts and improved unemployment benefits agreed last year won’t be extended. That implies a fiscal tightening of over 1.5% of GDP, and makes next year’s earnings estimates look too optimistic, says James Mackintosh in the FT.
While it’s possible that Europe’s leaders will quickly come up with a lasting solution, their record bodes ill. With the world economy “on a slippery slope”, as Stella Dawson puts it in The New York Times, the short-term outlook for equities is grim.