Sinking Markets in Europe: Blame Greece and Spain?

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Sinking Markets in Europe: Blame Greece and Spain?
See who the real culprits are

By Nathaniel Williams
Fri, 08 Jun 2012 09:15:00 ET

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Everything seemed rosy in Europe in March. Stocks were on cruise control after their best start in years, and most mainstream financial types bought into the idea that the worst in Europe was over. The June 2012 Global Market Perspective described the climate this way:

"The Financial Times discussed Europe's 'stress-free bank rebound;' analysts applauded the sector's 'compelling case for further gains;' and the world's largest investment bank, Goldman Sachs, upgraded European banks, because it believed that the ECB would continue to support the sector with unlimited cheap credit through its Longer-Term Refinancing Operation (LTRO)."

Yet one analyst stuck his neck out -- with a deeply contrary forecast. In the March 30, 2012, Global Market Perspective, European Market Analyst Brian Whitmer said that Europe was simply experiencing "the calm before the storm."

Then the storm came. During May, all major European indexes plunged. Spanish stocks, in particular, were hit hard, sinking 25%. Wave analysis helped Whitmer pinpoint an imminently bearish Elliott wave pattern developing in Spanish stocks in March.

Now, after the devastation of May's market action on European stocks, analysts are looking for after-the-fact answers and wondering "what on earth went wrong." A May 21 editorial in the Wall Street Journal pointed the finger squarely at Greece and Spain:

"As recently as two months ago, the European banking system seemed safe from the threat of liquidity problems. The ECB's huge loan program, implemented late last year to prevent banks from running out of money, stuffed banks with enough money to refinance their maturing bonds for all of 2012. But the combination of new fears that Greece will leave the euro and the increasing fragility of Spain's banking system has quickly ended that honeymoon."

Such a rationale is common. But, as Whitmer explains in the new Global Market Perspective, both of these explanations are off the mark. He writes:

"First, Greece is largely yesterday's news, as fears regarding the country's exit from the eurozone have waxed and waned for more than two years. Second, the fragility of Spanish banks is one of Europe's worst-kept secrets. So neither rationalization explains why fear is mushrooming now."

In other words, the fundamentals in Greece and Spain were no different in March than in May. What was different was that the price of stocks (which reflect social mood) plunged, just as Whitmer anticipated back in March. So Greece and Spain didn't cause the downturn; social mood did.

What about now? Has the storm passed, or should you batten down the hatches? In the new June Global Market Perspective, Whitmer looks at measures of social mood and other technical indicators to give you a clear answer. And you get three key signs to look for before a European recovery can begin. It's a must-read perspective for anyone with a financial stake in Europe.

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Tags: eu, european markets, social mood

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