Financial markets are showing that we are in volatile times as they react extremely to almost any news. Yesterday, several negative pieces of information coincided to rock the global markets and create widespread declines on world stock markets.
Small-business sales decreased for the first time since January in the United States despite lower production prices there. Two other factors were rumors of Greece exiting the troika´s bailout plan and falling petroleum prices.
Still, a bad day of news is not enough to cause the Ibex to fall 3.59% in a day of trading to close at its lowest point since March at 9,838 points. We need to look deeper. In the past two weeks, the Ibex has fallen 12%. This decline compares to the 18% selloff that we saw in July 2012, when over the course of 21 days the ECB launched its first campaign to keep the euro alive. Something similar is happening now as bad economic data combine with fears about the euro?s future to drive down stock prices.
But japonificatoin is the biggest fear now. Falling GDP followed by flat growth, deflation and high public debt is the norm in Europe today. Germany slashed its own growth forecast to just 1.2% for 2014, a rate that countries such as France and Italy are jealous about.
The slowdown in Germany is already affecting peripheral Europe. In August Spanish exports fell to a level not seen since 2009. Reacting similar to how they did in 2012, the markets know that Europe is at a critical point. The ECB says that it will ?do whatever it takes to save the euro.? Facing the third recession since 2008, Draghi?s words might fall short even if his version of Quantitative Easing (QE) tries to keep the euro alive.
The comparison to the US Federal Reserve is not accidental. The US struggled in 2010, but got out of a recession through a massive bond-buying program led by former Chairman Ben Bernanke. Because the EU has different US, sometimes opposite, fiscal strategy, the QE policy might not work well in the Old Continent.
So Draghi should keep pushing nations that use the euro to enact deep structural reforms. The ECB meets on November 6, and this meeting needs to be more productive than when leaders last sat down in October. We need a concrete plan to buy bank stocks. Perhaps the central bank will remember the warning it issued in August: ?The risk of doing too little is greater than the risk of doing too much.?
