Global Stock Markets Rise, but Fear of Budget Gaps Expands

After four weeks of continuous decline, stock prices on global markets rose last week, thanks to support from EU leaders for financially troubled Greece, but investors remain cautious due to the tightening of Chinese monetary policy and weak economic indicators from the US and Europe.

On Wall Street last week, the Dow Jones index strengthened by 0.9 percent to 10,099 points, and the S&P 500 rose by the same amount, reaching 1,075 points. The Nasdaq index jumped 2 percent to 2,183 points. This marks the first weekly increase for these indices after four weeks of decline. At the beginning of the week, the Dow Jones dipped below the psychologically significant level of 10,000 points for the first time in three months, a result of investor fears regarding the consequences of the Greek debt crisis.

Although the Greek economy is small, its massive budget gap has shaken confidence in the euro and caused turmoil in the European bond market. Investors fear that an escalation of financial problems in the eurozone, given that Portugal and Spain also have huge budget deficits, could undermine the recovery of European economies.

"Greece is small compared to the entire eurozone, so its problems alone would not cause such concern. However, everyone fears the spread of ‘contagion’ to other countries and similar problems not only in Europe but also in other parts of the world. The question of the health of the global financial system is once again being raised," says Brett Hryb, portfolio manager at MFC Global Investment Management.

However, by mid-week, the market calmed down, and the Dow Jones returned above the 10,000-point level after EU leaders promised assistance to Greece, which alleviated investor fears of a debt crisis erupting in other eurozone members. However, EU rules prohibit direct assistance in cases of excessive public spending, as is the case in Greece, so EU officials will need to devise a way to specifically help the country next week.

"It seems that EU leaders are indeed getting things in order, so the market reacted positively just to the fact that they decided to respond and that there is some kind of plan. We will see how they will implement it," says Stephen Carl, director at Williams Capital Group.

In addition, there are still a number of unanswered questions, so investor uncertainty is expected in the coming days. One of those questions is the exit strategy of the US central bank. Last week, Fed Chairman Ben Bernanke indicated in a report to Congress how the central bank would begin to withdraw stimulus measures from the market. First, he said, it would tighten monetary policy by withdrawing cash from the financial system, and then increase short-term interest rates.

In his most detailed presentation of the exit strategy to date, Bernanke also indicated that the Fed could soon raise the discount rate it charges banks for emergency loans. He announced that it would increase the interest rates paid on bank deposits, which should lead to higher interest rates on loans to companies and consumers, which in turn should tighten lending conditions.

"Although the US economy still needs the support of loose monetary policy, at some point the Fed will have to tighten financial conditions," said Bernanke. Although he emphasized that the central bank does not intend to raise the cost of money yet, such announcements have unsettled investors.

"The withdrawal of the Fed’s stimulative monetary and credit measures is expected sooner or later. However, investors are unsettled because we are in a complicated transitional period, in some kind of false world created by stimulus measures, and we must return to a normal state. This is complicated because, while monetary authorities will withdraw from some areas, they will continue to intervene in others. This could be very sensitive for financial markets," says Paul Ballew, economist at Nationwide Insurance. Investor uncertainty is also a result of the tightening of monetary policy in China and weak macroeconomic data from the US and Europe.

Chinese monetary authorities unexpectedly raised the reserve requirement ratio for banks on Friday, the second time in just over a month, in order to slow down credit growth and the ‘overheated’ economy, thus eliminating inflationary threats. Having avoided recession, China has so far been one of the main drivers of global recovery, so a slowdown in the growth of the world’s third-largest economy could jeopardize the recovery.

Investors were also shaken by data indicating a slowdown in recovery in Europe. The eurozone economy grew by only 0.1 percent in the fourth quarter of last year, while in the previous quarter, GDP growth was 0.4 percent. Meanwhile, Germany, the largest European economy, stagnated.

Even the latest macroeconomic data from the US does not inspire confidence. Indeed, retail sales rose by 0.5 percent in January, which is higher than the expected 0.3 percent, but data on industrial inventories and consumer confidence are weaker than anticipated.

"There are more and more interconnected problems. There is the issue of the debt crisis in the eurozone, the slowdown of the local economy, the tightening of monetary policy in China, and finally, the anemic recovery of the US economy. All of this brings uncertainty to the market," says Quincy Krosby, strategist at Prudential Financial.

Stock prices also rose on European exchanges last week. The London FTSE index jumped 1.6 percent to 5,142 points. The Frankfurt DAX strengthened by 1.2 percent to 5,500 points, while the Paris CAC gained 1.0 percent, reaching 3,599 points. On the Tokyo Stock Exchange, the Nikkei index rose by 0.3 percent to 10,092 points. (H)