ShareThisWhat goes up must come down or easy come, easy go. That’s the way I would characterize the stock market’s wild ride during the second half of September, 2010 up to November, 2010. The Dow Jones industrial average (DJIA) traded below 11,000 on November 16 for the first time in nearly a month as concerns rose about inflation in Asia and more signs of trouble for European Union’s (EU) economy as European leaders met to discuss a bailout of Ireland.
The Dow fell 198.56, or 1.8 percent, to 11,003.41, having dipped below 11,000 earlier in the day for the first time since Oct. 20. The Standard & Poor’s 500 index fell 22.51, or 1.9 percent, to 1,175.24, while the Nasdaq composite index fell 46.06, or 1.8 percent, to 2,467.76.
Across the Pacific, South Korea’s central bank’s decision to raise interest rates to curb inflation resulted in Asian markets’ global sell-off in stocks. Shares also fell in major cities like Shanghai and Hong Kong as speculation spread that China will take more steps to rein in its red-hot economy, which would lower global demand for industrial goods.
Meanwhile, across the Atlantic, investors are selling off Irish and Portuguese bonds. That resulted in driving the borrowing costs of both countries to euro-era records and reinforcing worries about the heavy debts some European governments are carrying. The European Union’s (EU) debt crisis caused panic through Wall Street. Major stocks tumble in latest trading. Member states like Greece, Ireland, Italy, Spain and Portugal are all experiencing budget shortfalls and, sooner or later, will need financial bailouts from wealthier member states while raising doubts about EU’s viability.
Ireland, in particular, is caught between a rock and a hard place in the midst of the EU’s debt crisis. Its government must convince international investors that it won’t have to tap an emergency EU-IMF fund and won’t keep sinking billions more into its most debt-crippled bank. Ireland also confirmed that it remains mired in recession, further depressing sentiment for its loan-repayment prospects.
According to the Associated Press (AP), worries over Ireland’s ability to fund its own debts and those of five state-insured banks have driven the interest rates on Irish bonds to a series of record highs dating back to the 1999 launch of the euro. Rates on existing bonds rise when they’re being dumped by investors, because yields increase as prices fall. If risk perception remains high, paying those higher rates is the only way to attract new buyers when governments need to borrow again. The yield on 10-year Irish bonds rose to 8.25 percent from 7.94 percent. Higher yields are a sign that investors are demanding more money for their willingness to take on the risk of lending to that country.
A couple of years ago, Ireland’s bond interest rates were nearly identical to those of Germany, the benchmark of safety in the 16-nation euro zone. But those days are over. Investors today demand increasingly higher Irish rates as compensation for their belief that the Irish are among the most likely in Europe to fail to pay them back. Greece is on top of that list followed by Ireland and Portugal.
Similar problems in Greece earlier this year hurt stocks worldwide as its government had to get bailed out by fellow European nations and the International Monetary Fund. Greece fell into a fiscal crisis following runaway spending and a lack of trust from investors following revelations that Greece published faulty budget figures. Ireland, meanwhile, is staggering under the costs of nationalizing three banks after that country’s real estate boom imploded.
Greece, which is rebuilding its finances with a euro110 billion loan from the EU-IMF fund, says international bond speculators are unfairly punishing the weakest euro-zone members. Greek debt is rated the world’s riskiest; its 10-year bonds are paying a giant 9-percentage point interest premium above German treasuries.
Portugal faces similarly tough choices. It’s just beginning the process of slashing its spending to get a deficit under control, and its latest bond issues this week also commanded punitive premiums: A euro750 million auction of new 4-year and 10-year bonds paid out yields of 4.69 percent and 6.24 percent, respectively. Portugal’s 10-year bonds were offering yields 4.08 percentage points above their German counterparts, another euro-era record.
The stock market is in a dire need of good news to sustain its rally. However, bad economic news keep coming in from across the Atlantic and the Pacific with no relief in sight. And the high unemployment rate and housing crisis that continue to bedevil the U.S. economy only exacerbate the economic downturn. When will this economic crisis end? Although the National Bureau of Economic Research (NBER) declared that the Great Recession ended in June, 2009, it seems like we are still in the midst of a recession. While most economists are saying that the economic crisis is over, majority of the American people are not buying it. What gives?