Will Europe Create A Panic Situation?

It’s always been amusing to see the financial media’s compulsion to produce a reason—often an imported one—for each day’s movements on the stock markets. ‘Asia weak on US jobs data’; ‘Nifty down on Europe debt worries’; ‘Stocks up on Greece deal’; and so on and so forth, day after day. I’m told that these foreign ‘cues’, as they are called, are of little use to actual traders. Their primary utility is probably to people who have to talk about or write about the markets on day-to-day or an hour-by-hour basis.

Over the last many weeks, most of these headlines have involved Europe. One week, the markets are said to rise because there’s prospect of a deal on Greece, another they allegedly fall because Italy’s yields have shot up. The funny thing is that these ‘Europe debt worries’, as they are often called in the wire service headlines, are likely to be either irrelevant or a drastic under-reaction.

Either, one of these days, the Germans will suddenly have a change of heart and let the ECB print Euros at will and to underwrite sovereign debt; or, the Eurozone will breakup, probably in a month or two. Till a point, it was fine for long-term investors to essentially ignore Europe, leaving day traders and short-term investors to worry about the worries. The expectation was that one way or the other, Europe’s politicians would eventually figure out the right thing.

However, in the last few days, things have come to a pass where the end of the Euro must be given higher odds. If this really comes to pass, then all bets are off. By January or February, there could be a panic situation and there’s no telling where the markets might end up. In a panic, equities could easily fall to a point that would have appeared impossibly low before the panic began. We all saw that just three years ago.