Markets ahbor a policy vaccum and uncertainty

Financial markets are discounters and setters of value that only function properly when they can see clearly what lies ahead. When they cannot as now they tend to panic and assume the worse, and then some.

It is hard to believe markets will take much comfort from the machinations of the G20 meeting this weekend, or some not so subtly leaked news about possible discussions to enlarge the European support fund that is not even yet voted into existence by national parliaments.

Leaderless eurozone

In fact, these news items just serve to underline how bad the situation has become with Europe as a headless chicken with no leader or leadership. The endless committes with mult-lingual translation can talk until the wee hours every day for a century and achieve absolutely nothing.

The markets have a keener sense of reality and know it will require a big shock to make these guys sit up and actually do something. Last week’s fall in equity prices was a shot across the bows. Who knows where the next stampede will come.

For the moment the US dollar and T-bonds are the safe haven asset class. That will persist as long as the eurozone crisis is unresolved and while a six-week deadline is presented as a kind of ultimatum for somebody to do something, nobody is absolutely sure who that refers to but it will not be the person saying it who thereby passes on the blame.

Dubai debts

But policy vacuums are dangerous in global financial markets. The National today points out that Dubai’s debt refinancings and asset sales will be much more difficult in this environment as will those for Kuwait’s heavily-indebted investment companies.

However, the bigger threat comes from a credit squeeze on trade finance and a return to the recession of 2009. That will put world business and banking into a downward spiral again though the most indebted will fare worst. That is what markets are beginning to price into stocks but it has only begun.

Will the Europeans manage to come up with a debt-on-debt deal to sort out their sovereign debt crisis? Even if they do can we not wonder aloud if this is not a repeat of the US experience of QE2 that pumped up financial markets but failed to improve the real economy and proved inflationary?

Investors are wise to stay defensive and cautious although precious metals are looking a bit oversold.