Resilience to the Greek shock?

For many weeks, financial markets seemed to be shaking off the threat of a Greek default and an imminent global public debt crisis. While spreads on government bonds of debt-laden EMU countries were exceptionally high, this did not affect emerging market spreads – even in those countries with elevated risks. Corporate bond spreads were also continuing to drift down. Market-to-market contagion – as seen in the financial market crisis 2008/2009 – was not evident. On the contrary: in recent weeks equity markets had been leaping from one annual high to the next, clambering back towards pre-crisis levels. Enthusiastic investors were driving up commodity market prices, copper was flirting with an all-time high. This did not look like the “new normal“ everybody is talking about. It was also striking that many markets saw volatility fall sharply. Volatility readings for the US and German equity markets dropped below their historical average.

Are the markets relying too much on low interest rates and abundant liquidity and overlooking major problems of public and private debt? Will the “Greek shock” cause a lasting downturn on the markets? We believe that markets may not be that wrong after all and that some fundamental improvements have warranted market advances. The markets are not completely out of sync with real economies. Expectations had been overly pessimistic. That was being corrected, driving prices upward. One expectation was that the US and other industrial economies would take years to reach the level they had before the crisis. Well, the US will have achieved that at the end of 2010; growth should be around 3% this year. And the emerging markets are thrusting ahead despite Greece. For the European economy the recovery period may be longer, but activity indicators imply that momentum is building up here as well. In this environment profits have improved more quickly that had been expected. As a matter of fact, reported profits in the second quarter of 2010 have already reached pre-crisis levels for some of the leading stock indices.


Dr. Michael Heise

PDF (72 kb)