Saturday, December 17, 2011

Markets have second thoughts on EU fiscal pact

After reading the fine print on the EU's new fiscal pact, investors had a change of heart last week as stocks and commodities tumbled across the board. Confidence in the proposed fiscal union quickly unraveled as the market realized that economic growth may be more difficult under stricter austerity measures. US Stocks fell 3% as the Dow finished at 11,866 and the S&P 500 ended the week at 1219. Indian stocks were even weaker as the Sensex lost 4% closing at 15,491 with the Nifty coming in at 4651. Gold plunged 7% and broke below $1600 for the first time since July. This bearish outcome was pretty much in line with expectations as the Mars-Rahu aspect depressed sentiment. I thought this would likely make the first half of the week more vulnerable to declines and this was the case in the US and in commodity markets such as gold and oil. The late week brought the anticipated rebound as the dual ingresses of the Sun and Venus injected a measure of relief. Mumbai extended its slump into the late week, however, as worries over the falling rupee and the RBI update undermined the otherwise improving mood.

The problem is that the European Central Bank is unwilling to give the markets what they want. The bond market is signaling that debt levels are unsustainable and must be brought down. This is what the latest EU agreement addressed by imposing strict limits on the size of future government deficits in the Eurozone. But that means that governments will have to cut spending and raise taxes -- two things that reduce economic activity. A slowing economy means lower corporate profits, and this creates a drag on stocks as investors rethink the risk-reward of owning stocks. Theoretically, the ECB could undertake a Fed-style quantitative easing program and buy large amounts of sovereign debt from teetering economies like Italy and Spain, but its mandate does not permit it to do so. In addition, there is a political unwillingness to undertake such an inflationary policy, probably because Germany is the puppet master here and it does not want to fuel inflation and thereby lower its standard of living.

The stock market was looking for more stimulus and liquidity from the EU and the ECB but it was disappointed when all it got were more promises to cut spending. As I have been saying for a while now, the growing strength of Saturn here tends to reduce the possibility of a stimulus QE-style program. Saturn's opposition with Jupiter limits the range of policy action as collective psychology may be more geared towards accountability and responsibility. "Getting one's house in order" and "doing the right thing" are very typical catch phrases of this conservative Saturn-Jupiter ethos. Parenthetically, I should say that I don't actually believe that the planets somehow 'cause' these mental states or events. It may only be that there is a correlation between planetary positions and the ebb and flow of these collective phenomena. A giant cosmic clock, so to speak, where the planets are the hands of the clock and they tell us what 'time' it is, i.e. what mood should prevail. Metaphysics aside, the current Saturn-Jupiter aspect would tend reduce the probability of an announcement of any major central bank liquidity "bazooka" in the near term. The aspect is due to make its closest angle in early January and will still be quite close until Saturn's retrograde station on February 9.

The planets this week seem more positive than last week as Jupiter is seemingly highlighted more than Saturn. That said, the early week period does look more vulnerable to declines as Monday's Sun-Saturn aspect could see distress involving governments (more EU downgrades?). This could easily correlate with a decline in stocks and especially gold which is usually more sensitive to afflictions to the Sun. Tuesday's Moon-Saturn conjunction is another potentially problematic aspects, although it may be offset somewhat by Venus-Jupiter. A rebound seems set to begin on Tuesday or Wednesday as Venus moves into aspect with Jupiter and Uranus. The Sun follows suit by Thursday so that should serve to lift the mood of the markets. Friday's Moon-Rahu conjunction is more suspect, however, so weakness may be more likely at that time.