The markets didn’t just vote on the Euro summit

By Felix Salmon
December 9, 2011

Am I feeling a bit sheepish about my extreme pessimism of last night, in the wake of a healthy stock-market reaction in both Europe and the US? Not really. Markets did rise, but the movement was within what you might consider standard noise for stock indices these days: roughly 2% in Europe, a little lower in the US. A resounding vote of confidence in the EU this was not: instead, it looks more like the bad deal done in Europe was already priced in, and the markets just continued, today, on their normal volatile and noisy path. In fact, it’s not at all clear that the EU treaty was responsible for any of today’s market move at all.

In the video I shot yesterday with TBI’s Simone Foxman, Simone talks about how Europe’s bailout mechanism is a fragile thing. For one thing, she admits that “the ECB has to get involved in one way or another”, and that we’re not seeing that right now; later on, she wonders whether the markets would even place all that much faith in a German guarantee of PIIGS debts if Germany has been downgraded. “It’s going to be really tricky to not lose a lot of investor confidence” if and when the eurozone breaks up, she says, and when Germany is called upon to provide guarantees, “by then, markets may not trust them enough. If that fear keeps rolling, it snowballs down the mountain and all of sudden becomes an avalanche”.

This is one of those situations where the conventions of reporting market moves on a daily basis are decidedly unhelpful if you want to get a feel for what’s going on in Europe. The fact is that Europe still has a lot of very strong companies, which are worth real money going forwards; in many ways, owning those companies is a much smarter thing to do than simply putting your euros on deposit in a European bank. So looking at the share prices of European companies is really not a great way of working out what the market thinks of the prospects for the future of the eurozone. And looking at the value of the euro doesn’t help much either. Instead, you want to look at more obscure indicators, like the amount that Italian and Spanish banks need to pay if they want to borrow money on the interbank market.

More simply still, just look at the amount of new capital that Banco Santander — one of the strongest banks in Spain, if not Europe as a whole — is now being asked to raise. (More than €15 billion, if you must know.) Here’s Santander’s share price, over the past couple of years. The thing to notice is the inexorable downward slide, not any small uptick today. Does anybody really think we’ve now seen the all-time lows for this indicator? If not, then let’s stop treating intraday market noise as some kind of referendum on the latest Euro treaty.


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I think you have to remember that these days, a significant portion of all trading activity is very short term, i.e. with a time horizon too short for any decision made at the EU summit to actually have an impact. Not just the millisecond computer-driven trading that we’ve all heard about, but also trades that last minutes, hours, and days, rather than months or years.

So to ascribe any type of “judgment” to the actions of the markets is, in my opinion, a big mistake.

These days, much of the action in the markets is completely disconnected from the long-term problems of the real world.

Posted by mfw13 | Report as abusive

mfw13, who could disagree with you? Not my Grandfather, who lost everything in the markets of yesteryear. His losses took days!

Markets can’t really disconnect from long term problems, when that’s where the bulk of “saving” are, but you can be darn sure there are many behind the scenes trying to prop them up. Who cares about long term when it can all change in a millisecond? Whoo hoo win and lose even faster. Who needs a casino! (besides it’s mostly other people’s money traders get their kicks from

If you glimpse behind the curtain there will be several “wizards” manipulating the voice of reason and calm. Fear is the driver of markets and people really do want a pie in the sky solution, even if it is a summit that will likely do nothing to prevent a European melt down.

When every mention on the internet, media sources or a mere “fat fingered error” can make an impact on the market, it is a volatile place to be connected to at any time. Many people still want to make those bets, but you can be darn sure those with money have as much hedged in less volatile places than the market.

Those of us without much money would be wise to step away from the curtain and prepare for reality to step in and take its course.

“It’s going to be really tricky to not lose a lot of investor confidence” is a pretty interesting way to precede a discussion about a devastating avalanche.

Posted by youniquelikeme | Report as abusive

The “news” didn’t seem to impact sovereign debt very much. Since the meeting was to try to solve the sovereign debt problem, not an equity market problem, one would think that a real solution would impact the debt markets in a signficiant way.

Posted by ErnieD | Report as abusive

@ mfw13 – timely words, completely agree with their sentiment

(quote) “to ascribe any type of “judgment” to the actions of the markets is, in my opinion, a big mistake.”

(quote) “these days, much of the action in the markets is completely disconnected from the long-term problems of the real world.”

Posted by scythe | Report as abusive

Clearly Felix your pessimism was misplaced since the markets didn’t react.

People are finally realising that change in the EU takes time, and while journalists have daily deadlines, the EU politicians and officials do not. Perhaps it would be a good idea for journalists to refrain from hyperbole and hyping up each successive meeting as a ‘last chance to save the Euro/EU/World Economy/mankind’ so we might then begin to see what’s really going on?

Posted by FifthDecade | Report as abusive