After another week of confusion and turmoil in Europe, investors are ditching whatever hopes they once had for a conclusive solution to the debt crisis.
That may foreshadow a gloomy holiday season in markets, especially if wary investors opt to reduce risk in their portfolios and take refuge in U.S. Treasuries and the dollar.
Just weeks after it seemed leaders had drafted a master plan to solve the crisis, doubts rose about whether Greece would back a 130 billion-euro bailout.
Disaster may have been averted when Greece, under fierce EU pressure, agreed over the weekend to form a new government that would approve the deal and stave off bankruptcy.
But that did little to calm investors, who were already looking ahead to the next problem: Italy. Italian bond yields hit a euro-era high of 6.4 percent Friday, raising fears the country may soon need a Greece-style emergency bailout.
The Greek agreement “may spark a brief relief rally,” said Alan Ruskin, head of global G10 currency strategy at Deutsche Bank. “But it won’t last and we will soon go back to focusing on Italy.”
“At the end of the day, it does seem like a grand plan is elusive at best,” said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.
“We’ve seen one European bank and one U.S. brokerage fail. We know there are strains for French banks. We’re wondering how long it will be before Greek default worries spread to Italy and Spain,” he said. “In a situation like that, money managers are going to decide to simply take their risk down.”
(Source: Reuters vis Yahoo!)
The Dow and S&P500 lost 0.69% this week, and the NASDAQ dropped 0.80%.