Monday, November 29, 2010

Markets continue to fall on Ireland, Portugal and Spain

North American markets continued to fall on Monday, as investors continued to remain worried about the sovereign debt crisis in Europe. The S&P 500 was down 0.14 points to 1,187.76, while the Dow fell 39.51 points to 11,052.49. Last week, North American markets were also down on contagion fears, despite encouraging employment and GDP data from the US. For the week, the S&P 500 fell 0.86%, while the Dow dropped 1%.

Despite Ireland having agreed to a bailout package, and the EU today agreeing on a $85 billion euro package, it is obvious the euro zone situation is far from over. The details of the Ireland package still needs to be decided, and the coalition Irish government could be facing an election at any time. In addition, investors believe that after Ireland is successfully bailed out, Portugal will be next. This process could take several weeks to play out. 

Finally, Spain could also require a bailout. Despite the Spanish Prime Minister stating adamantly on Friday that his nation does not need to be rescued, investors are showing that they believe otherwise, pushing the spread on Spanish government bonds to record highs. Since Spain's economy is 70% larger than Greece, Ireland and Portugal combined, the $440 billion euro EFSF is adequate for a bailout of Spain.

Looking ahead to this week

With the sovereign debt crisis in Ireland, Portugal and Spain expected to drag on longer, North American stock markets will likely head lower this week. It is worthy to note that before markets began to correct in November because of news from the euro zone, markets were clearly in overbought territory. However, markets have not fallen much from their November highs, meaning that there is still room for markets to head lower.

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