Europe’s leaders have once again found the words to turn the markets to rally mode, but can we believe them? This critically important question for investors and wealth-builders comes during a crucial week that could see off the bears and usher in a nice bull run.
But can a rally last? That is the big question.
Good signs
In case you missed it, here is the great market data that will undoubtedly push our stock market up again today:
- In the US, the Dow was up 1.46%, smashing through the psychologically important 13,000-level at 13,075.66.
- The index is now up 7.02% for the year to date.
- The Nasdaq is up 13.55% for the calendar year; and
- The S&P 500 went up 1.91% over the weekend and is up 10.21% for the year to date.
For local investors, the S&P/ASX200 index was up around 3.7% for the year and, with dividends and franking credits, stocks have been better than term deposits. But will this gain last and get bigger or disappear?
This week could settle it with the following big issues bound to farewell the bears and welcome the bulls – or vice versa:
- The influential EU group will follow up with meetings this week on a new rescue for the euro following the European Central Bank (ECB) boss, Mario Draghi, saying he will do “whatever it takes” to save the euro.
- The US Federal Reserve has a monetary policy meeting where a third quantitative easing package (QE3) could be unleashed on the US economy.
- Another US jobs report is out on Friday and a bad number could increase expectations that QE3 will come next month if it doesn’t happen this week.
- More US economic data that could help or hinder the rally includes personal income and spending, house price data, the Chicago purchasing managers index (PMI), factory orders and the Institute of Supply Management (ISM) readings for manufacturing and services.
Something up the sleeve
I think Ben Bernanke, the Fed boss, would love not to have to use QE3, but he will pull it out of his hat if stock markets turn down heavily. Unlike our own central bank governor, Glenn Stevens, Bernanke is very concerned about the wealth effects transmitted from the stock market.
So if the Europeans help the market head higher, Bernanke could hold fire on QE3. On the other hand, he might shoot for a double-bunger effect by pumping in a QE3 to coincide with an overdue, credible rescue plan from the Europeans.
There are so many ifs and buts when it comes to what Europe can come up with, but I think the penny is dropping. With German economic readings really softening, a long recession is in train unless the ECB gets bond yields down for the likes of Spain and Italy.
This week could be the most important for determining whether we can start waving goodbye to the bears, but history has taught us that you simply can’t over-rely on our European Union (EU) friends. Or are they our EU fiends?
One thing is certain, if we get good news this week, those share prices of BHP Billiton (BHP) and Rio Tinto (RIO) we have seen lately will be remembered as a great value plays that many missed the boat on, but this does depend on decisions from the main game — Europe.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.