The interesting thing about the EU’s recent straining and groaning in the global equities market is that we’ve seen this movie before. People realize how bad the Greek financial situation is, the markets quake, reassuring statements are made by financial managers, the market stabilizes, another round of bad news breaks out, and markets and investors are spooked again. The Spanish have a word for this-zarzuela. It’s as if there’s a coordinated dance in which market players take their places but nothing really profound happens. Put simply, how many times have you heard that Greece will leave the EU? How many times have you been spooked by the possibility of the EU monetary union falling apart? Still, despite all this drama, the euro is still holding its own. This sequence between good and bad news out of Europe has become almost routine. In fact, many analysts say the possibility of a Greek pullout has been ‘priced into’ the euro’s price and most markets’ valuations.
The problem of interconnected global markets
While there is a lot to recommend the theory that global market players have priced in Greek weakness, instability, and possible monetary union withdrawal, this assumes that all other markets will be stable. After all, this was what happened to Southeast Asia. When Thailand, Singapore, and other ASEAN countries went through a financial crash in 1997, the US and European markets were so strong that, outside of ASEAN, few other external markets felt the impact of the Asian financial crisis. In fact, the US and European markets were cruising along full speed. The possibility of Asia (and other markets) holding back the EU finance contagion is not looking very likely. First, thanks to weakness in China’s economic growth, slowing global demands for Asian exports, and otherwise sluggish growth in non-US markets, it appears Asia might be swept along by any euro-based bad news. Second, Asian markets are so interconnected to EU markets thanks to billion dollar inflow and outflows due to hedge funds that if Europe catches a cold, Asia might turn out to develop pneumonia. Quite a very worrisome picture indeed. Thankfully, the price of gold has crashed recently. This might be a good time to buy precious matals