Volatility intensifies as Franco-Belgian bank collapses and Italian debt downgraded
Posted on 05 October 2011 with 3 comments from readers
The eurozone financial crisis took several turns for the worse yesterday with the downgrading of Italian debt by Moody’s, the collapse of the Franco-Belgian bank Dexia and a delay to the next instalment of the Greek rescue package.
Wall Street perversely rallied in its final hour on a few comforting words from EU officials but Asian stocks later continued to sell-down.
These are volatile times on financial markets. The Greek tragedy is being played out by politicians and the twists and turns are so slow and drawn out it makes a mockery of technical analysis, or just shows its true limitations depending on your point of view.
Volatility indicator
However, one thing most technical and fundamental analysts would agree on is that volatility is not usually a good indicator for markets. Normally volatility ends in a crash – a capitulation sell-off that resets markets to levels from which they can gradually rally or flatline.
That ought to be caution enough for the perennial optimists who still have some money left and would like to buy back into these markets as soon as possible. As ArabianMoney explained at some length yesterday the so-called attractive valuations are meaningless because of the true outlook for profits and the highly artifical state of global interest rates (click here).
But what is going to bring this crisis to a head? For that is what needs to happen before we can have any peace. Well, it is obvious really. Greece has to default and the markets absorb the impact. That could happen as soon as October 13th or the eurozone can wrangle on for a bit longer.
Market solution
In the end markets will most likely have to force the eurozone into action, so paralysed is the decisionmaking process of the EU. One problem for dealing with the Dexia insolvency is that Belgium has not had a government for over a year. Italian debt is also a far bigger problem than that of Greece.
Deutsche Bank yesterday scrapped its profit forecast and warned of a longer than expected downturn. Wall Street is looking for the easy way out of this crisis but it does not exist anymore than it did with Lehman Brothers in 2008.
If you’re really stupid you can convince yourself that this crisis has been around for so long that the players must know all the cards by now. Frankly that is just idiotic, when you are in the realms of chaos theory anything can and will happen.
3 Comments posted by readers:
“Normally volatility ends in a crash”. One would expect this to be wrong and it is:
http://www.investorplace.com/2011/08/high-volatility-usually-means-its-time-to-buy/
It does however require strong nerves to buy when the financial pundits claim the sky is falling.
Any resolution of the European debt crisis, even if only delaying collapse for another couple of years, will set off a huge stock market rally in the USA. The Dow could hit near 13,000 by year end, as I forecast early this year. On Tuesday, it went up 340 points in one hour on an article in the FT that European bank recapitalization was being engineered. Computers will bid it up fast as all the automatic buy programs start. The collapsing bank shares are getting the attention of the European elites who will demand action from the politicians they control. Just like in the USA, they will put more debt on the backs of the taxpayers. They know that they will be taken care of when they are thrown out of office in the next election.
Of course, there are no guarantees.
The credit default swaps might be interesting. Is there another AIG out there? As that hedge fund manager said on CNBC TV, a lot of people are going to lose a lot of money.
Ed Note: Dexia is you AIG… But the EU is not the US, there is no button to push to solve this crisis! Wall Street imagines one and that sends the index up but it is just not there!
@ Bill:
The MAIN reason why the US market went up sharply on 4 Oct in late trading is because the president’s Plunge Protection Team was hard at work . . . supported, of course, by the Bernank and his gang. It didn’t go up because of the childish reasoning expressed by CNBC. It also went up on 5 Oct . . . for the same reason.
I wonder how much longer this can continue, until the general market correction becomes so strong that even the PPT and the FED can’t counteract it.
Ed Note: A brilliant observation, why else would such a rally happen at the end of trading for no particular reason?