Monday, December 6, 2010

Markets fall on euro zone debt crisis

North American markets closed lower today on continuing concerns over the euro zone debt crisis. The S&P 500 fell 0.13% to 1,223.12, while the Dow fell 0.17% to 11,362.19. Last week, markets made strong gains despite euro zone troubles. For the week, the S&P 500 rose 3%, while the Dow rose 2.6%.

News from Germany helped to push markets lower, as Germany rejected calls by other euro zone countries to increase the size of the $750 billion euro bailout fund.

Gold shines

Spot gold rose to an all-time high of US$1,429.4/ounce today. Meanwhile, US December gold futures rose $9.90 to settle at $1,416.1/ounce. Gold rose today due to Ben Bernanke's interview on 60 Minutes, in which he discussed possible further quantitative easing beyond QE2.

Last week, gold also made gains. It rose 1.2% on Friday to $1,406/ounce. For the week, gold was up 3.1%. This was caused by euro zone woes, and the ECB's decision to support troubled euro zone countries using essentially quantitative easing measures.

Contagion spreads

Early last week, contagion in the euro zone spread from the riskier PIIGS nations to other countries. Belgium saw its spread against German government bonds rise. Belgium was targeted because of its 118% debt-to-GDP ratio, one of the highest in the euro zone. In addition, its government is considered to be unstable. Meanwhile, Italy became the next country in the centre of attention after Ireland, Portugal and Spain, as the nation's government bond spreads also rose.

Encouraging economic data

By the middle of the week, good economic data from China and other countries offset euro zone woes. For example, China's November PMI rose for 4 months in a row to 55.2, better than the 54.8 that markets expected.

ECB intervenes

On Thursday, the ECB announced measures to help the troubled PIIGS nations. The measures largely involved buying government bonds of the troubled countries. Thus, the measures are a form of quantitative easing, and the announcement pushed the price of gold higher.

The week ahead

With the euro zone debt crisis far from resolved, investors can expect markets to head lower this week. With Ireland having accepted a $85 billion euro bailout package, investors are now focused on Portugal, Spain, Italy and even Belgium. However, negative news can still emerge from Ireland, since the details of the bailout package have yet to be decided. In addition, the situation in Spain has been relatively stable, which leaves room for significant negative news to emerge. Thus, investors should expect gold to continue to outperform for the rest of the year.

Investors should also keep in mind that it is now the second week of December, so the Santa Claus rally is in full swing. In fact, positive sentiment last week limited falls due to euro zone concerns.

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