EmailEuropean stock exchanges are up about 1% and S&P futures indicate an up open of about nine points after European Central Bank President Draghi announced that there will be a European program for conditional purchases of government bonds. Full details were not available as of this posting but the conditions appear to be fairly strict.
The intention of making it easier for Spain and Italy to finance their deficits amounts to a prescription of painkillers rather than something that will ultimately cure the illness. The symptom of pain from high interest rates may ease, but this program won't help Spain, Italy, Greece, or any other country approach long-term fiscal stability or increase competitiveness.
The financial markets are hopeful that the bond buying program will buy time for Europe to address longer-term problems and thus help improve the fundamentals for equities. There is also no doubt that the risk of a credit market implosion or a euro-breakup is alleviated by this program. The bounce in the stock market is therefore understandable, but the problem of deepening recession in Europe still exists.
ADP reported a strong 201,000 gain in August employment. This is a mixed bag for the stock market. It suggests that that August payroll gain to be reported Friday will be above current forecasts of just 140,000. A larger payroll gain would be good for the economy, but reduces (perhaps greatly) the likelihood that the Fed will vote in favor of further quantitative easing at the September meeting.
The S&P 500 index has been in a fairly tight 1400 to 1420 range the past month. Bullish support from expected central bank action has been offset by a worsening outlook for earnings and worrisome global economic trends. The painkillers are certainly helping, and are arguably a valid prescription. Eventually, however, the underlying fundamentals need to improve before global economies and stock markets are truly healthy again. It still is far from clear that the fundamentals will improve as much as the stock market is anticipating.
Founder and Chairman, Briefing.com
