Unleashing the stimulus beast

Global share markets are now gearing for the most important couple of weeks since the global financial crisis.

By the end of the month we should have a much better idea of where the world is headed. Markets are looking for a triple-header stimulus covering Europe, the US and China and there is no doubt that without substantial action we are headed for tougher economic times.

In Australia, the economy is struggling and the print press is catching up to the Business Spectator revelations that $100 billion to $200 billion in mining projects are being mothballed (Australia to world: "Do not invest here",July 31).

The action in Europe starts tomorrow when the so called troika – the European Commission, the International Monetary Fund, and the European Central Bank – meet in Athens to tell the Greeks that unless they change their restrictive labour laws there may be no more bail out money. The Greeks do not have great bargaining power and are likely to agree.

Last night, another Spanish province pleaded for national government funds and more money is required for Spanish bank rescues. Against that background German Chancellor Angela Merkel will fly to Madrid this week to meet with Spanish Prime Minister Mariano Rajoy.

Normally Rajoy would have limited clout with the German Chancellor but Rajoy has a close ally in Italian Prime Minister Mario Monti who has great sway over Angela Merkel because Italy is capable of leaving the euro (Monti, Draghi and the Goldman pact, August 20)

The toika meeting in Athens and the Merkel-Rajoy talks in Madrid will set the scene for Thursday's statement by European Central Bank chief Mario Draghi, who is expected to announce a massive bond-buying program. Mario Draghi's problem is that the powerful German Central Bank, the Bundesbank, is opposed to the scheme but provided the Merkel-Rajoy talks go well and Spain agrees to labour reform and further austerity, Draghi should not pull punches.

However, on so many past occasions Europe has primed markets for action and always fallen short. Markets are punting that Draghi will deliver but there are no certainties. Next week the German courts deliver a verdict on whether using German funds to prop up Europe is constitutional and Dutch elections are held. Those two events could deliver negative surprises.

Meanwhile the US Federal Reserve is taking its time over the schedule for the next quantitative easing but it's coming. The commodity and share markets should get a great speculative drive when it happens.

And finally, China is slowing faster than was expected so Asian markets are now looking for more stimulus action.

And, of course, later in the year Australia looks set for an interest rate cut.

If Europe, the US and China deliver, then it will suck a lot of money into the share markets from the sidelines.

If they disappoint then it will be a nasty time.