A Fed shadow over the real market monsters

Last night’s fall on global markets was much more than simply a reaction to the US Federal Reserve's prediction that quantitative easing would be scaled down this year and end in 2014.

If that’s all it was then there is no need to panic because if the US economy does not recover as fast as anticipated then the Federal Reserve will simply take to the money printing pumps again.

No, the market is now giving us much more serious warnings.

Firstly, it's telling us that the world has learned nothing from the global financial crisis and that global institutions, lead by the big global banks and their clients, have been gambling in much the same way as they always do. There are some big, well-deserved losses out there. And the failure of the US Congress to curb Wall Street excesses adds greatly to global risk.

Secondly, and more importantly, I can smell another crisis in Europe.

Spanish bonds are close to being classed as junk, and if that happened a vast number of institutions would have to sell. Greece, as expected, wants yet another bailout and when – if? – this one is finished they will be back to the begging table in a year’s time.

Italy looks very shaky. I could go on with these spot dangers but, more seriously, yesterday Oliver Marc Hartwich explained that that in September or October, just after the Australian and German elections, Germany's constitutional court will rule on the legality of the European Central Bank’s bailout policies. There is great opposition in Germany to the fact that all Germany’s hard-won savings are being sent down the drain rescuing badly run European countries. The court could, in effect, end German guarantees of the ECB bailouts. Almost certainly it would be the end of the euro and the bank losses so created would hit share markets hard.

It might not happen but the Hartwich commentary is essential reading (Germany's grip over 'whatever it takes', June 20).

Stock markets have now turned away from concentrating on events that boost the markets to things that are bad for markets – so the European crisis will be back on centre stage.

As far as Australia is concerned the losses by overseas investors on our market will exceed 20 per cent if you combine the currency and the share market. They have received a terrible beating and they will not return in a hurry.

That of course will not stop the normal short covering bounces while the lower dollar makes the fortunes of our miners and big exporters/overseas operators much better, and value is returning to our shares.

But the June 2013 market fall is a global event that warns us that the Big Bull Run over the last six months is over.