Underneath all the noise about the precarious state of the euro and many of the countries behind it lies a noteworthy event that has gone largely uncelebrated.
More than three-quarters of the companies comprising the broadly-based Standard & Poor's 500 index have beaten the Street's financial expectations for the first three months of the year, delivering one of the best reporting seasons on record. In addition, industrial output and retail sales are growing faster than expected.
But the rocky stock market is now dancing to a bleak new tune, looking ahead to the possibility of a sovereign default by at least one Western nation and the likelihood of years of stagnant growth in Europe.
The leadership of the European Union waited too long to treat its sick patient - bloated national debts and deficits - and now investors realize they may get tripped up by another financial calamity years in the making. If the Lehman Brothers collapse was the catalyst for the global meltdown in September, 2008, what effect would the financial failure of a Western nation have on global markets? That is the dark thought among investors today.
For several weeks it has been more expensive to purchase insurance against the default of some European nations than it has been to buy credit default swaps for investment-grade corporate debt. Even if the experts can't quite figure out the market's machinations, the market has clearly registered European politicians' inept management of their sovereign finances.
The gargantuan rescue package announced a week ago by EU leaders and the International Monetary Fund might eventually allow for a new course. But the market is still doubtful and capital has flooded out of the region, leaving the euro hovering near a four-year low against the U.S. dollar.
Benjamin Reitzes, an economist with BMO Nesbitt Burns Inc., says the emergency measures show that EU leaders are committed to saving their common currency and are taking a likely first step toward fiscal union. But they face a new reality, he adds. "Europe can no longer afford to put off its fiscal problems, markets just won't allow it and the euro may not survive it."
Investors will likely continue to favour the U.S. currency and Treasuries while Europe's future remains unclear. That has experts expecting the price of oil to remain weaker than its recent average. Crude prices are at a three-month low, and the latest selloff last week isn't justified solely by fears of slack demand from the European economy. Rather, oil prices are now reacting to fears of another global slowdown.
Brian Clouse, managing director of institutional equity trading at Wellington West Capital Markets Inc., says the weakening of both oil and copper prices is the clearest indication to him that investors are taking money off the table.
"Sentiment has become quite negative. There's been a huge change in the last few weeks. The market is overlooking good news and more keen to grasp the bad news," he says. Europe, as well as regulatory reform of the U.S. financial industry, are the two biggest clouds over the market, and he doesn't see either rolling away any time soon. The best-case scenario is for a market correction of 10 to 15 per cent over the next few months, setting the stage for a nice fall rally, he adds.
In North America this week, economists will be tuned to the latest consumer price index data. The numbers should give a read on inflation and the prospect of rising interest rates, especially in Canada where the central bank meets June 1 to decide whether to bump up its key rate.