Swallowing a sour market chaser

A slowing US economy, and deteriorating European economic and political environment are suffocating market euphoria and refocusing investors on pitfalls that lie ahead.

Global sharemarkets experienced a euphoric start to the year, with investors gleefully pouring their money into high-risk investments. But in recent days, the mood has soured and investors are now beginning to focus on the three major perils that lie ahead.

1) Slowing US economy

Investors are now fretting about the robustness of the US economic recovery after figures released on Friday showed that the pace of US job creation slowed sharply in March. Only 120,000 new positions were created last month, well below the 200,000 jobs that economists had been tipping. In addition, the average work week declined slightly, as did average hours worked.

The number of workers hired on a temporary basis shifted into reverse in March, to minus 8,000 compared to 55,000 in February, while retail jobs shrank by 34,000 in March, and construction jobs dropped by 7,000.

The latest figures support the argument of those economists who argued that the strong rise in employment in January and February was simply the result of the unusually mild winter that the US experienced, which made it possible for building work to continue, and for people to get out to shop.

The slowdown in job creation in March has caused some economists to downgrade their estimates of US economic growth for this year. At the same time, it has made investors nervous that the US could be about to see a replay of what happened in 2010 and 2011, where early signs of economic strength were crushed by a mid-year slowdown.

2) Deteriorating situation in the eurozone

Investors are now worrying that the European Central Bank’s "monetary morphine” – the €1 trillion in cheap loans it injected into the region’s banking system – is now wearing off.

Even though most global sharemarkets have remained fairly robust, major European share markets (with the exception of Switzerland) have suffered declines over the past month. Both the Spanish and the Italian sharemarkets have fallen by around 10 per cent.

At the same time, Spanish and Italian bond markets are also flashing strong warning signs. Increasingly, investors are selling off Spanish and Italian government debt, which is pushing their yields higher.

Last week, yields on 10-year Spanish bonds jumped to 5.81 per cent, the highest level since December 12. At the same time, yields on Italian 10-year bonds also rose sharply to finish the week at 5.49 per cent.

Spain’s Economy Minister, Luis de Guindos, has tried to reassure investors who are becoming increasingly nervous about the country’s ability to deliver on its promise to slash its budget deficits. In an interview with the German newspaper Frankfurter Allegemeine Zeitung, published on the weekend, he vowed that Spain would not need a bailout. "We will come out of this even stronger, and without external aid," he promised.

However, he acknowledged that 2012 would be difficult, with the country experiencing lower growth and higher unemployment, "but we are laying the groundwork for a better 2013." Spain’s economy is expected to shrink by 1.7 per cent this year, while the unemployment rate will rise to 24.3 per cent, according to government estimates.

In the interview, de Guindos also tried to reassure investors that the central government would be able to force the 17 autonomous regions, which are responsible for health and education spending, to cut their budget deficits. He signalled that the Spanish government’s next step would be to reform the health and education systems "that is, a rationalisation of spending in the autonomous regions”. Investors, however, are likely to remain sceptical.

3) Growing political uncertainty

Investors are now realising that there is a growing risk that Europe’s economic crisis could trigger a political and social crisis. Already, there are signs of a growing backlash, with the "indignant” movement in Spain, and the protests against the new property tax in Ireland.

Last week, violent protests erupted in Athens after a 77-year old retired pharmacist shot himself in the head near Syntagma Square, outside the Greek parliament. A note he left behind accused the Greek government of impoverishing him with its tough austerity measures. "I find no other solution than a dignified end before I start searching through the trash for food,” it said.

The note added: "The Tsolakoglou occupation government has taken away any trace of my ability to survive”, likening the Greek government to that run by Giorgos Tsolakoglou who headed a collaborationist government when the Nazis invaded and occupied Greece during the Second World War.

The suicide quickly became a political issue in Greece, with thousands of people bringing flowers, candles, and leaving messages near the site. "It’s not a suicide, it’s a political assassination”, read one message.

Investors are concerned that a growing political backlash against austerity could either spark a political crisis in some of the debt-laden peripheral eurozone countries, or else that we could soon see the emergence of popular political movements which reject the painful economic programs currently being pursued.

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