Sunday, July 4, 2010

Markets continue to fall as U.S., Europe and China fears persist

It has certainly been a very tough week for markets worldwide. As of Friday, the Dow has fallen 7 days in a row, which is the longest negative streak since it fell for 8 days in a row in October 2008, during the depths of the financial crisis. In Canada, the TSX faced a similar fate as it ended the week down 511.79 points, including a 343.17-point drop on Tuesday.

The markets were dogged by 3 concerns this week: economic growth in the U.S., Europe and China. Early this week, there was a concern about the health of European banks as the ECB ended its program to make 1-year loans to banks, forcing banks to repay $442 billion. However, banks' subsequent demand for ECB's 3-month loans only totalled $131.9 billion, which was far lower than market's expectations of $200 to $250 billion. This showed that European banks were more well-capitalized than some had feared.

Tuesday's heavy fall for markets was a good overview for the whole week, as economic fears for the U.S., Europe and China pushed the Dow down 268.22 points and the TSX down 343.17 points.

Of the factors troubling markets this week, I think only the U.S. economic worries are justified, with the worries for Europe and China being overblown. With the U.S. unemployment rate at 9.5% and decreasing extremely slowly, U.S. economic growth in coming years will be slower than in previous cycles. This should be priced into stocks, and it is in fact being done.

However, a lack of bankruptcies in Spanish regional savings banks, and this week's low demand for the ECB's 3-month loans shows that the European situation is better than many are fearing.

As for China, the Conference Board's downward revision for its April leading economic indicator for China was the reason for fears of weak Chinese growth this week. However, the upward revision by the government for last year's GDP growth from 8.7% to 9.1% is a perfect example that the country continues to grow at its usual rapid pace. Similar to the U.S., monthly economic data emerging from China will continue to drive markets up or down on a given day. However, the fact remains that the economy there continues to grow at an 8 to 10% rate, with the government working to cool or stimulate the economy as the need arises.

Thus, while economic fears for the U.S. are seemingly justified, fears for Europe and China are overblown. Therefore, there is upside potential when investors realize this. However, it seems that fears will remain in the coming weeks, and I expect U.S., Europe and China fears to continue to pull markets lower this week.

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