David Morris

THE European bailout package stunned traders and investors alike. Initially, hopes were high that it would help shore-up confidence. But looking at the markets’ reaction to last weekend’s announcement, European leaders must be extremely concerned by the results so far.

Over the course of the week, European stock indices managed to rally around 3 per cent, but the single currency fell more than 3 per cent against the dollar. Although many argue that a cheaper currency will help Eurozone members – specifically Germany – export their way to prosperity, the sell-off is a stark rebuke from investors. Now Europe has to deal with involvement from the IMF and there is also the damage caused to the reputation of the European Central Bank (ECB) after ECB President Trichet performed a U-turn over the Bank’s acceptance of Greek junk debt as loan collateral.

While the recent strength of precious metals tells us how nervous investors are over the future of fiat currencies, European equity investors should keep a very close eye on what is happening on Asia Pacific stock markets. The Hang Seng has been on the back foot as investors in the region have been unnerved by the continued liquidity withdrawal by the People’s Bank of China. But in addition to this, Asian Pacific investors have been taking far more notice of developments in Europe than their counterparts in the US. Europe is a huge market for exports from the region. The worry is that economic growth and European demand will be stifled by the austerity packages that are being put in place. Since the Renminbi is pegged to the dollar it has strengthened significantly against the euro in recent weeks. This is hurting the competitiveness of Chinese goods in the Eurozone and it’s easy to see why China’s exporters might be concerned. Fears of a slowdown in trade to Europe goes some to explaining yesterday’s 5 per cent drop on the Shanghai Composite stock exchange.