North American markets fell this week, ending a 5-week streak of gains. For the week, the Dow and the S&P 500 were both down 2.2%. This was mostly caused by Irish sovereign debt concerns, and tightening by the Chinese Central Bank.
Trouble in Ireland
Troubles from Ireland emerged early in the week, as the spread between Irish and German government bonds hit one record after another. Markets also began to believe that the EU and IMF need to put together a rescue package for Ireland. Troubles from Ireland began to surface in early September with the nationalization of Anglo Irish Bank. This also reported on troubles from Ireland as soon as they surfaced. However, expectations for QE2 overshadowed euro zone problems in September and October.
Tightening in China
The Shanghai Index fell 5% on Friday, after rumours spread that China will raise the interest rate in the coming months. This followed the Central Bank's recent decision to raise banks' capital ratio by 0.5%. This also caused the Dow and S&P 500 to fall on Friday.
The price of gold fell this week along with other commodities. For the week, gold futures were down 2.3% and closed at US$1365.5/ounce.
Outlook for the week ahead
With sovereign debt troubles finally catching the market's attention, and tightening expected to continue in China due to strong GDP growth and inflation, this maybe the perfect storm that can send markets more than 10% lower. The situation in Greece in May showed that sovereign debt crises take a long time to resolve, due to politics and social issues. Thus, the debt trouble in Ireland is likely to also weight on markets for several weeks. In addition, Portugal is expected to be the next country to face a similar situation as Ireland.