European Secession Votes and Market Implications: Scotland

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager and International Strategist

This first blog in a two-part series will examine the Scottish secession vote coming in September and the potential implications for financial markets. The second blog will delve into the Catalan vote in November.

“There is the real possibility of one or several national divorces being initiated in Western Europe in 2014,” opines Nicholas Siegel, program officer at the Transatlantic Academy, a U.S.-European think-tank based in Washington.[1]

Secession votes will be held in the UK in September over the future of Scotland and in Spain in November over the future of Catalunya. It appears unlikely that either will result in a real separation of the regions from these nations. However, financial markets should still monitor the progress of these votes. Markets appear to discount a rejection of secession. If voters in one of these regions were to vote for secession, that could trigger near-term volatility. Regardless, these votes highlight fragility in the fabric of the European Union that warrants monitoring.

Voters in Scotland will elect whether to remain a part of the United Kingdom or to secede and claim independence. A “Yes” vote would lead to binding negotiations between the Scottish and UK Governments for eventual secession. Recent polls suggest pro-independence voters will not succeed as a plurality of voters leans against independence.[2]

Quint_SecessionScotland_8.19.14In the event of a vote for independence, complications both for the UK and Scotland could ensue. The size of the economy and population of Scotland is less than 10% of the UK; yet, these statistics conceal a few hurdles. Much of the energy produced within the UK falls within Scottish jurisdiction. Many UK financial services companies are based in Scotland (though the majority of their revenues derive from outside Scotland). Moreover, the Bank of England has stated that Scotland would have to use its own currency instead of the British Pound Sterling.

The costs of independence could bring with them financial turmoil at least for an independent Scotland. However, the UK itself might not go unscathed as the British Pound Sterling is a reserve currency that could lose support. Major corporations, such as Standard Life, could relocate from Scotland back to the UK

Even a “No” vote, though, does not necessarily put an end to the matter. A narrow vote could give way to a second future vote and have repercussions for future votes on the UK remaining in the EU and general elections in 2015. A “No” vote that fails to win overwhelmingly could potentially accelerate the timing of the referendum for whether the UK remains in the EU.

In terms of financial markets, the closest recent comparable is Canada, which experienced two failed referenda regarding the secession of Quebec in 1980 and 1995. In both instances, markets did not underperform global markets leading into and post the referenda. Although markets shrugged off the referenda, over time many large Canadian corporations relocated their headquarters out of Quebec.

[1] “Is Secession the Answer? The Case of Catalonia, Flanders, and Scotland”, December 2, 2013 retrieved on http://knowledge.wharton.upenn.edu/article/secession-answer-case-catalonia-flanders-scotland/ .

[2] Lukyano Mnyanda, “Scots Anti-Independence Camp Gains in Poll amid Pound Doubts”, August 13, 2014, Bloomberg News.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Investment Insights Podcast – August 13, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded August 11, 2014):

What we like: Fair amount of correction in the equity markets around the world; small correction also in U.S.

What we don’t like: U.S. stock market will likely correct closer to their 10% before the Fed finishes bond-buying program in October

What we’re doing about it: Hedging more during seasonally-weak time period; mindful of midterm elections

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Monthly Market and Economic Outlook: August 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After pushing higher for most of July, the U.S. equity markets fell -2% on the last day to end the month in the red. Continued geopolitical concerns, a debt default in Argentina and a higher than expected reading on the Employment Cost Index could have provided a catalyst for the sell-off. Investor sentiment levels were elevated in July, so it is not surprising to have any bad news lead to a short-term pull-back in the equity markets. However, we believe equity markets are biased upward over the next six to twelve months and further weakness could be a buying opportunity.

U.S. small cap stocks have significantly lagged large caps so far this year. In July the small cap Russell 2000 Index declined -6.1%. The Russell 2000 is down -3.1% for the year-to-date period, compared to the +5.5% gain for the Russell 1000 Index. From a style perspective, value lagged growth in July but remains solidly ahead for the year-to-date period.

Developed Europe significantly lagged the U.S. equity markets in July, but Japan was able to deliver a positive return. Emerging markets continued their rally in July, gaining +2.0% for the month. Emerging markets have gained +8.5% through the first seven months of the year, well ahead of developed markets. Countries that struggled in 2013 due to the Fed’s taper talk, like India and Indonesia, have been very strong performers, while negative performance in Russia has weighed on the complex. The U.S. dollar has shown recent strength versus both developed and emerging market currencies.

New York Stock ExchangeU.S. Treasury yields edged slightly higher in July. The 10-year yield has fallen 56 basis points from where it began the year (as of 8/7/14), while the 2-year part of the yield curve has moved up eight basis points. As a result, the yield curve has flattened between the 10-year and 2-year tenors; however, it remains steep relative to history. While sluggish economic growth and geopolitical risks could be keeping a ceiling on U.S. rates, relative value could also be a factor. A 2.4% yield on a 10-year U.S. Treasury looks attractive relative to a 0.5% yield on 10-year Japanese government bonds, a 1.1% yield on 10-year German bonds, and a 2.6% yield on Spanish 10-year sovereign debt.

All taxable fixed income sectors were flat to slightly negative on the month. High yield fared the worst, declining -1.3% as spreads widened 50 basis points. Municipal bonds were slightly positive for the month and continue to benefit from a positive technical backdrop with strong demand for tax-free income being met with a lack of new issuance.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with quantitative easing slated to end in the fall, U.S. short-term interest rates should remain near-zero until 2015 if inflation remains contained. The ECB and the Bank of Japan are continuing their monetary easing programs.
  • Global growth stable: U.S. growth rebounded in the second quarter. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow but steady. The unemployment rate has fallen to 6.2% and jobless claims have fallen to new lows.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash. M&A deal activity has picked up this year. Corporate profits remain at high levels and margins have been resilient.
  • Less drag from Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year. Fiscal drag will not have a major impact on growth in 2014, and the budget deficit has also declined significantly.

Risks facing the economy and markets remain, including:

  • Fed Tapering/Tightening: If the Fed continues at the current pace, quantitative easing will end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual and the economy appears to be on more solid footing this time. Should inflation pick up, market participants will shift quickly to concern over the timing of the Fed’s first interest rate hike. Despite the recent uptick in the CPI, the core Personal Consumption Expenditure Price (PCE) Index, the Fed’s preferred inflation measure, is up only +1.5% over the last 12 months.
  • Election Year/Seasonality: While we noted there has been some progress in Washington, we could see market volatility pick up later this year in response to the mid-term elections. In addition, August and September tend to be weaker months for the equity markets.
  • Geopolitical Risks: The events in the Middle East and Russia could have a transitory impact on markets.

Risk assets should continue to perform over the intermediate term as we expect continued economic growth; however, we could see increased volatility and a shallow correction as markets digest the end of the Federal Reserve’s quantitative easing program. Economic data, especially inflation data, will be watched closely for signs that could lead the Fed to tighten monetary policy earlier than expected. Equity market valuations look elevated, but not overly rich relative to history, and maybe even reasonable when considering the level of interest rates and inflation. Investor sentiment, while down from excessive optimism territory, is still elevated, but the market trend remains positive. In addition, credit conditions still provide a positive backdrop for the markets.

Asset Class Outlook

Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Source: Brinker Capital

Brinker Capital, Inc., a Registered Investment Advisor. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index

Investment Insights Podcast – June 6, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded June 5, 2014): Bill reacts to the long-awaited policy change announcement from Mario Draghi, president of the European Central Bank.

What we like: Announcement met or exceeded expectations; lower interest rates; bank lending stimulated; a wide variety of positives overall

What we don’t like: Didn’t deliver the “helicopter”; fell short of establishing a program to buy securities, similar to quantitative easing

What we are doing about it: Leaning towards a more bullish posture in Europe; looking at emerging market companies that would benefit from the lower interest rates

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Sentiment

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

In February 1637, tulip bulbs sold in Holland for as much as 4,000 guilders each, over 10x the amount a skilled craftsman would earn in a year.  Months later, many tulip traders found themselves holding bulbs worth just a fraction of what they had paid for.

As crazy as prices got, tulip mania actually started with good fundamentals. Tulips were a relatively new introduction to Europe, and the flower’s intense color made it a heavily-desired feature of upper-class gardens. Most desirable were the exotic-looking, multi-colored tulips, which was caused by a mosaic virus not identified until the 1970s and now called the “tulip-breaking virus.” At best, tulip bulbs weren’t easy to produce and those with the virus suffered even lower reproduction rates. In the beginning, what occurred in the tulip market was classic supply and demand—a highly sought-after item with limited supply increasing in price. In 1634, that started to change as 11.1.13_Raupp_Sentimentspeculators were attracted to the rising prices, and in late 1636 prices started to accelerate rapidly, to where even single-color tulips were attracting prices of over 100 guilders apiece. The Dutch created a futures market for tulips that enabled traders to purchase and trade contracts to buy bulbs at the end of the season. At the peak, tulips could be traded several times a day without any physical tulips actually being exchanged or either party ever having any intention of planting the bulbs.

Then in February 1637, buyers vanished. Some suspect an outbreak of the bubonic plague as the cause, some a change in demand caused by war in Europe. Any way you look at it, the sentiment for the future price of tulip bulbs took a big U-turn, leaving many investors ruined.[1]

11.1.13_Raupp_Sentiment_1History is full of similar episodes, where investor sentiment got to extreme levels and prices diverged meaningfully from the underlying fundamental value of something, be it stocks, real estate, currency, or even tulip bulbs. Most recently the dot-com bubble in the early 2000s and the housing bubble in 2008 proved that speculation is alive and well.

While periods of extreme sentiment are easy to identify in retrospect, they’re anything but obvious while you’re in them. And while extreme levels of sentiment usually result in big price reversals, more modest levels can mark periods when the market is overbought or oversold, often followed by a market pull-back or rally. Recently, Robert Shiller of Yale University won the Nobel Prize in Economics for his work on irrational markets.

11.1.13_Raupp_Sentiment_2So how can you gauge sentiment? Some of the more popular ones are the Consumer Confidence Index and the Michigan Consumer Sentiment Index, which both try to gauge consumer’s attitudes on a variety of things, including future spending, the business climate, and their level of optimism or pessimism. More direct, and generally more volatile, are the AAII Investor Sentiment Survey and the Wells Fargo/Gallup Investor and Retirement Optimism Index, which ask investors directly about their thoughts on investments. It doesn’t end there. Investors watch Closed-End Fund discounts, Put/Call ratios, even tracking the occurrence of certain words or phrases in the media. In addition, many firms create their own blend of surveys and indexes to best gauge the overall sentiment level.

Sentiment certainly isn’t the be-all, end-all for trading your portfolio. There’s a saying that is attributed to John Maynard Keynes, “The market can remain irrational longer than you can remain solvent.” When sentiment starts moving in one direction, it’s hard to say when the reversal will occur and what will cause it. But knowing where sentiment levels are at any given time can help you get a better understanding of what markets have been doing and what to expect going forward.


[1] Mackay, Charles (1841), Extraordinary Popular Delusions and the Madness of Crowds, London: Richard Bentley, archived from the original on March 31, 2008.

There’s a Reason It’s Cheap

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

A few years ago when I was down the shore in New Jersey with my family, I decided it was time for my then nine- and six-year-old children to try one of my favorite childhood pastimes—boogie boarding. For those unfamiliar, a boogie board is a (very) poor-man’s version of a surf board; basically a short board that helps you ride waves either on your stomach or, if you’re really good, your knees. So we went to the store to buy a pair of boards and found a pretty wide price range— $10 for the 26-inch, all-foam board to $100+ for the 42-inch poly-something-or-other board with the hard-slick bottom. Being a bit of a value investor, and not knowing how much the kids would like riding waves, I went with something much closer to the bottom end of that range. To make a long story short, three hours later I found myself with a broken board (who knew a foam board couldn’t handle a 200+ lb dad demonstrating?), a broken ego, and a trip back to the store to purchase a new pair of boards—this time closer to the middle of the price range. A good lesson for the kids, but definitely a reinforced lesson for me, is often when something is cheap there’s a very good reason why.

8.22.13_Raupp_Cheap_1I’m reminded of this lesson when I look at global equity valuations, particularly those in Europe. Forward P/E ratios (stock price divided by the next 12 months of projected earnings) in most of the major Eurozone countries fall in the 10- to 12-times range, which is relatively cheap from a historical perspective. Compared to the U.S. at 14½ and other developed countries like Japan and Australia at close to 14, the region seems pretty attractive. Tack onto that that the Eurozone has just emerged from its longest recession ever, and the idea that markets are forward-looking, it would seem like a great opportunity to rotate assets into cheap markets as their economies are improving. And we’re seeing some of that in the third quarter, as the Europe-heavy MSCI EAFE index has outpaced the S&P 500 by about 3% quarter-to-date.

But, similar to low-priced boogie boards, buyers of European equities need to be aware of the risks that come with your “bargain” purchase. This past Tuesday, German finance minister, Wolfgang Schauble, admitted that there would need to be another Greek bailout next year even though they’ve been bailed out twice in the last four years and restructured (defaulted on) 25% of their debt in 2012. All told, about $500 billion has gone to support an economy with a 2013 GDP of about $250 billion, and it hasn’t been enough. And by the way, youth unemployment is approaching 60%, and 2013 has seen multiple protests and strikes over austerity measures.

8.22.13_Raupp_Cheap_2Beyond Greece, Portugal and Ireland are running national debts of over 120% of GDP and could need additional bailout money. Italy is operating with a divided government and a national debt of over 130% of GDP, and the Netherlands and Spain are still on the downward side of the housing bubble. Germany has been Europe’s economic powerhouse and has played an integral role in containing the debt issues on Europe’s southern periphery. But they’ve been grudging financiers, so much so that German chancellor Angela Merkel has gone to great lengths to avoid the topic of additional bailouts ahead of upcoming German elections.

Sometimes that bargain purchase works out. You get the right product on sale or you’re able to buy cheap markets when the negatives have already been baked into the price. But make sure you’re considering all the angles, or you could quickly end up back at the store.

A Tale of Two Currencies

Joe PreisserJoe Preisser, Brinker Capital

As the global marketplace continues to recover from the worst financial crisis since the Great Depression, two of the world’s major currencies, the yen and the euro, have embarked on remarkably different paths of late in a reflection of the efforts of the Central Bank’s, which guard the levers of these economies, to achieve growth and stability. The responses of the nations ‘ respective policy makers has led directly to a steep decline in the value of the Japanese Yen, while the European continent has seen its common medium of exchange rise to heights unreached since 2011. Although the nature of the challenges facing what are two of the largest economies in the world differ significantly, the efficacy of the monetary policies employed to combat them will have a profound effect on markets across the globe.

In Japan, newly elected Prime Minister, Shinzo Abe, has grabbed headlines after only a few weeks in office, through his advocacy of aggressive measures designed to foster growth within a nation that has been mired in stagnation. Dubbed “Abenomics”, the plan is a multifaceted approach to economic stimulus whose centerpiece is a desire to devalue the nation’s currency, in an effort to support its exporters by rendering the goods and services they provide less expensive on the world stage. According to the Wall Street Journal, on February 6th, “Analysts at Goldman Sachs Inc. estimate that for every 10 yen the currency weakens against the dollar, profits of exporters would rise by 7% to 10%.” Mr. Abe has professed his aim to achieve this through a controversial limiting of a measure of the Bank of Japan’s (BOJ) autonomy in an effort to effectively force the reflation of the economy through a program of unlimited monetary easing and large scale stimulus. In addition, the Prime Minister has pledged to fill the recently vacated position at the helm of the BOJ with an appointee who shares his commitment to revitalizing the country’s economy through all available means (The Economist, Jan 26th). The efforts undertaken thus far, combined with Mr. Abe’s emphatically-stated focus on combatting the deflation that has plagued Japan for more than a decade, have resulted in a sharp fall in the value of the yen, and a steep rise in equity prices listed on the nation’s exchange, which should be sustained as long as this endeavor proves successful. “The Nikkei has surged 32% since mid-November…The yen has declined 14% against the dollar over the same period…The gains in Tokyo have made Japan the world’s best-performing major stock market over the past three months ”(The Wall Street Journal, February 6th).2.8.13_Preisser_Currencies

On the Continent, the nearly four-year-old struggle to maintain its union in the face of a perilous debt crisis that threatened the world economy, has led to an unprecedented effort by the European Central Bank (ECB) to support the common currency. The fear of a possible dissolution of this unique collection of countries led directly to the widespread selling of the euro, as well as large scale liquidations of bonds issued by its sovereign members. As the cost of repaying the debt of a host of the European Union’s members rose to unsustainable levels the President of the ECB, Mario Draghi elected to act pledging to do, “whatever it takes to preserve the euro”(Bloomberg News July 26,2012). This statement manifested itself in a series of massive sovereign debt purchases by The Central Bank in September of 2012 which was dubbed, “Outright Monetary Transactions.” Mr. Draghi’s effort brought stability back to the euro-zone, and as a result led to an appreciation of its currency. As investors have become more confident that the worst of the crisis has been averted, the euro has risen further, and is now back to levels untested in two years. The sequence of events on the Continent stands in stark contrast to those in Japan, as Europe’s exporters have seen the cost of their products increase, thus making it more difficult for them to compete in the global marketplace. The threat that this state of affairs poses to the recovery of the region’s economy is such that it was directly and repeatedly addressed by Mr. Draghi this week during a press conference in which he suggested that the Central Bank may take steps to counter the effects of the currency’s rise. The ECB President was quoted by Bloomberg News as saying on Feb 7th, “The exchange rate is not a policy target, but it is important for growth and price stability…We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

The historic measures undertaken by both the European Central Bank, and the Bank of Japan in the interest of maintaining stability and fostering growth have thus far been largely successful, however it will be the ongoing maintenance of the consequences of this success that will ultimately determine the fate of these economies.

Is Europe on the Mend?

Magnotta@AmyLMagnotta, CFA, Brinker Capital

We have spent so much time focusing on the U.S. fiscal cliff that the concerns regarding Europe seemed to have been pushed to the sideline. On the positive side there has been progress in Europe. Mario Draghi, head of the European Central Bank, can take some credit for the progress. The Financial Times even named him their Person of the Year.

The €1 trillion Long-Term Refinancing Operation (LTRO) put in place in late 2011 helped fund the banking system. In July, Draghi pledged to “do whatever it takes to preserve the euro.” His words were followed up by the ECB’s open-ended sovereign bond buying program called Outright Money Transactions (OMTs) designed to keep yields on Eurozone sovereign bonds in check. The next step could be establishing the ECB as the direct supervisor of the region’s banks.

Source: FactSet

Source: FactSet

These actions have brought down borrowing costs for problem countries such as Italy and Spain, helping to change the trajectory of the crisis and prevent an economic collapse. Yields on 10-Year Italian and Spanish bonds have fallen over 200 basis points to 4.4% and 5.2%, respectively. The Euro has also strengthened versus the U.S. dollar since July, from a low of 1.21 $/€ to 1.32 $/€ today.

Source: FactSet

Source: FactSet

I wonder how long this lull in volatility in the region can continue in the face of a weak growth in the region. Seven Eurozone countries fell into recession in 2012 — Greece, Portugal, Italy, Spain, Cyprus, Slovenia and Finland. The Greek economy experienced its 17th consecutive quarter of contraction, while Portugal completed its second year of recession. There remains a stark difference in the economic performance of Germany and the rest of the Eurozone. Unemployment rates are at very high levels and continue to increase. Youth unemployment is above 50% in both Greece and Spain, a recipe for social unrest.

The ECB’s actions have bought time for the Eurozone economies to get their sovereign debt problems under control. However, continued austerity measures implemented in an attempt to repair the debt crisis have only served to further weaken growth in the region and exacerbate the situation by pushing debt to GDP ratios even higher. While some confidence has been restored to the markets, policymakers should attempt to implement more pro-growth measures to pull the region out of recession.

12.28.12_Magnotta_Europe_ChartCombo

Europe’s equity markets have rebounded nicely in 2012, leading global equity markets on a relative basis since the second quarter; the rally helped by the ECB’s actions. I remain concerned that the ECB’s measures, while improving confidence, do not address the underlying problems of weak to negative economic growth combined with deleveraging. Weak growth in the region should weigh on corporate earnings and keep a ceiling on equity valuations. The deleveraging process takes years to work through. Because the situation remains fragile, we are likely still prone to event risk and periods of increased volatility in the region.

Source: FactSet

Source: FactSet

Weaker Earnings Outlook Weighs on Stocks

Amy Magnotta, CFA, Brinker Capital

I wrote last week about the shaky start to the earnings season. That trend has continued this week and it is weighing on equity prices. Companies are beating on the earnings side (over 60% have beat earnings estimates), but revenue growth has been disappointing. As of October 19, only 42% of companies were beating sales estimates, the lowest percentage since the first quarter of 2009 (Source: FactSet).

Source: FactSet

In addition, forward guidance has been abysmal. Large companies, such as Caterpillar, DuPont and United Technologies, have been cautious on growth looking forward, both in the U.S. and abroad.* The number of companies delivering negative guidance is multiples of those offering positive guidance. Coming into 2012 companies had relied on margin expansion to grow earnings, but with margins at peak levels, revenue growth must follow in order to meet consensus growth expectations. This will be difficult to accomplish in this sluggish growth environment.

Source: Strategas Research Partners

While the Fed has tried to boost liquidity and asset prices with more quantitative easing, investors seem to now be focusing on the fundamentals. The uncertain macro environment, including risks surrounding the U.S. fiscal cliff, Europe, and a slowdown in China, is beginning to flow through and impact company earnings. We expect growth estimates for 2013 to be downgraded in response.

*Individual securities listed are shown for illustrative purposes only.

Potential for ECB Action Incites Strong Rally by Joe Preisser

Emphatic declarations of support for the Continent’s common currency, issued by The President of the European Central Bank, Mario Draghi on Thursday, and echoed by German Chancellor Angela Merkel and French President Francoise Hollande on Friday served to bolster investor sentiment and ignited a strong rally across global equities. The display of solidarity in defense of the euro project from the Union’s leadership seen this week came in response to the reemergence of fears of its possible dissolution as funding costs for the Spanish government soared to dangerous heights.

Trading for the week commenced as speculation that Spain would be the next member of the currency union to require emergency funding, swept through the marketplace, putting downward pressure on share prices around the world.  A decision by Madrid to offer financial support to the country’s struggling regional governments caused concern that the additional obligations would create an unsustainable situation for the heavily indebted nation. The yield on Spanish 10 year bonds rose above the record height of 7.5% on Tuesday, while Spain’s IBEX-35 stock index sank nearly 10% over the course of three trading sessions, reflecting the depth of trepidation with which the credit and equities markets view the difficulties currently facing the government.  According to Bloomberg News, “After taking on as much as 100 billion euros of bailout loans to aid banks, the risk…is that the additional burden of helping regions pushes bond yields to unaffordable levels.”

As the nations of the European Union continue to struggle to address the soaring borrowing costs faced by several of their member states, the trepidation this has created among investors around the globe revealed itself in several of the quarterly earnings releases issued this week.  The current situation on the Continent has deeply affected markets in the eurozone, reverberated across Asia, and is now being reflected in the profitability of corporations in the United States highlighting the global implications of the current crisis.  United Parcel Service, which delivers more packages than any company in the world, and Whirlpool Corp., the globe’s largest manufacturer of appliances both saw their shares fall after reporting earnings which failed to meet expectations (Bloomberg News). In its earnings release statement, Scott Davis, the Chief Executive Officer of UPS said, “Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion.”  

In an effort to hold down borrowing costs and to thwart contagion, the President of the European Central Bank, Mario Draghi, stated on Thursday that steps would be taken to halt the precipitous rise in the sovereign yields of several of the most heavily indebted members of the currency union.  Mr. Draghi was quoted by Bloomberg News as saying, “within our mandate, the ECB is ready to do whatever it takes to preserve the euro.  And believe me, it will be enough.”  The marketplace found solace in this statement, as the prevalent feeling among investors currently is that a direct sovereign bond buying by the ECB will be forthcoming, thus easing a measure of the acute effects of the crisis. With unlimited capacity on its balance sheet, the Central Bank is widely considered to be the only institution on the Continent capable of successfully intervening in the debt market to drive funding costs lower.  Bloomberg News quoted Bernd Berg, a foreign-exchange strategist at Credit Suisse, “Draghi’s comments that the ECB would do everything to preserve the euro currency gave some relief to markets and lifted asset prices after renewed euro-zone collapse fears.”

A joint statement issued by German Chancellor Angela Merkel and French President Francoise Hollande that their nations are, “bound by the deepest duty”(Bloomberg News), to maintain the currency union in its current iteration served to further ease investor concerns, as it reinforced the commitment of the Continent’s two largest economies to the euro project.  With a multitude of challenges facing the global economy it will be vitally important that the leaders of the European Union follow through in short order on the pledges made this week and work to drive sovereign yields back to sustainable levels, thus restoring a measure of stability to the marketplace.