A quiet week for traders, but lots to think about

It was yet another week of low volatility in equity markets. Indeed we are now experiencing levels of volatility which we were used to four years ago. This week there was little news of major importance for market participants to trade on, and as we write this piece the Dow Jones is trading exactly where it closed on Friday.  On a number of occasions during the week it has managed to push up and slightly beyond 10,600, but has failed on each attempt to find any support above that level and on each occasion has stumbled back below. Investors are content, it seems, to hold the course, with bears and bulls not making any major plays.

On Thursday, Pimco’s CEO Mohamed El-Erian wrote an article in the FT, in which he warned that deteriorating public finance may impact the global economy more than is currently realised.  We have written about this previously, warning that the astronomical deficits which nations are accumulating will put a drag on their ability to move quickly out of this recession and get anywhere near to the growth levels of pre credit crunch days.  Continuous public spending through issuing debt is not a viable strategy in the long term. The types of austerity measures which the Irish government has been forced to introduce, what Greece, amidst massive protest, is now trying to push through, will need to be put into place in the larger economies of the world.  Both the U.S. and the U.K. will need to tighten their public finances, and this will weigh on equity markets over the next few years.  Bill Gross, Pimco’s CIO had recently called the U.K. “a must avoid” for investors.  Consumer demand is the key element for achieving sustainable growth, and higher taxes and reduced government spending will most likely constrain disposable incomes in many of the world’s most powerful nations.

The saga in Greece is of more immediate concern to the markets.  The French have stated that they believe the E.U. should provide assistance to the beleaguered state, but the Germans have refused to offer such sentiment.  The country is undergoing massive internal strife, as the government attempts to reign in its deficit, and creditors continue to demand significant risk premium when lending to them.  The situation in Greece is of course important because it has placed the euro-zone in a very difficult bind.  There are rules which euro-zone countries must abide by, but on so many occasions these rules have been flaunted, and not just by the small nations.  The value of the Euro has declined dramatically over the past few months, as investors and speculations alike sell Euros on the back of the fragility and uncertainty which confronts the fledgling currency.  The ex Italian Prime Minister and current E.U. Commision chief José Manuel Barroso, has come out to say that the “no bailout” clause which currently exists could be circumnavigated, but this has had little impact on investor sentiment.

The principle markets which are affected by the Greek issues are the currency and bond markets, so for traders who are getting frustrated by the lack of movement in equities at the moment, it may be worth venturing into these markets.