The crisis on the eurozone has not stopped the FTSE, Cac and Dax climbing for most of the past three months, don't they realize the economy is in crisis?
Throughout the last three months of Greece-induced turmoil, stock markets have kept climbing. After a dip below 5000 in October and a relapse in November, the FTSE 100 has pushed its way to just below 6000. On Monday, at midday, it stood at 5910. The Paris Cac and German Dax, have followed a similar upwards, albeit volatile, path.
How can the markets have failed to notice that the future of the eurozone stood on a knife edge? Were they wantonly blind or stupid? As is so often the case in the closed world of stock and bond markets, they were neither.
First they believed in the Merkozy domination of Europe. Once French pPresident Nicolas Sarkozy acceded to German dominance and adopted Chancellor Angela Merkel’s austerity project, the EU was safe. All the rows and teeth-gnashing would be for nought. The Merkozy machine is unstoppable.
Second, the outlook for big business is rosy. After a series of asset writedowns, job layoffs and cash hoarding, the major corporations are ready to benefit from a recovery. In fact, they hardly need a recovery, a flat economy will be fine. But global growth is expected to gather momentum, especially as the Merkozy pressure on Athens means the Japanese, Chinese and Americans will stop worrying about a financial meltdown.
The latest HSBC equity survey argues that companies are continuing to beat analysts’ expectations.
“In the US, 61% of companies that have reported so far have beaten estimates and 29% have missed (based on a sample of over 70% of the S&P 500 companies by market cap). This is in line with its long-run average and a bit weaker than we have seen in recent years,” it says.
“In Europe, 53% have beaten estimates and 36% have missed, although only around one third of companies have reported. This is a modest improvement on Q3. Sales growth is coming in at 8% in the US and 5% in Europe,” it adds.
The consensus for growth in earnings per share for Europe is now 7% and HSBC says the shock this year might be that it is close to the mark. It forecasts 4% growth.
Another reason lies in the bond markets, which are increasingly seen as offering poor returns. The gap between safe havens and high returns has widened. Safe havens, like US and German government bonds, are so popular that investors must pay to park their cash. Countries like Spain that offer high returns could still default, putting at risk the original investment. Corporate bonds are limited in supply, driving down the yield and therefore the interest available to investors.
It all presupposes the euro crisis is over. That’s a big bet.