Last November, I warned that the only thing driving stock markets in 2011 was "politics and, to be specific, eurozone politics."
Six months later, I continue to hold this view. This year, share prices continue to be pushed around by political plots, rather than company fundamentals, liquidity, or economics.
FTSE 100 flops again
In the first quarter of 2012, Mr. Market's mood turned increasingly positive, largely thanks to 1 trillion euros' worth of ultra-cheap loans dished out by the European Central Bank. As a result, the blue-chip FTSE 100 (INDEX: ^FTSE) index of elite British companies hit a 2012 closing high of 5,966 on Friday, March 16.
Almost two months on, the Footsie has taken a big slide. Right now it stands at 5,460, down 115 points (2%) on Friday's close. This latest slide means that the U.K.'s main index has dropped by more than 500 points in two months, which is a dive of 8.5%. Hence, it looks as though the second quarter of this year will be as negative for investors as the first quarter was positive.
A Greece-y mess
As I said, the current weakness in share prices comes down to politics -- specifically, eurozone election results that have made investors increasingly nervous.
Right at the top of this "fear list" is Greece, which went to the polls on May 6. In a widely anticipated result, the ruling coalition won under a third of the vote, with anti-bailout candidates on the left making strong gains. Worryingly, the far-right, fascist Golden Dawn party took 7% of the vote.
Eight days later, Greece has yet to form a government, despite politicians burning the midnight oil in near-constant talks for the past week. The worry now is that Greece, having held an inconclusive election, will have to return to the polls for another round of voting.
What's more, there is some remarkable rhetoric coming out of Greece. Leaders of the far-left, anti-bailout Syriza party -- which came second in the election -- tell of a fabulous fantasy whereby Greece can default on its latest 130 billion euro bailout without leaving the euro zone.
On hearing this news, Mr. Market responded by driving down the Athens General Index (INDEX: GD.AT) to 583, down almost 5% so far today.
Germany versus France
Elsewhere in Europe, the election of Francois Hollande as France's first Socialist president in two decades put France on a collision course with Germany.
Hollande -- who campaigned as an anti-austerity and anti-finance candidate -- has promised to increase France's social spending, abandon austerity cutbacks, and renege on the EU's fiscal responsibility pact. This puts Hollande on track for a head-to-head collision with Angela Merkel, the German Chancellor fervently committed to austerity and responsible bailouts.
Clearly, cracks in the alliance between Europe's two biggest economies only add to the fear washing through European stock markets. As a result, the German DAX (INDEX: ^GDAXI) index has dipped another 2% today, while France's CAC 40 (INDEX: ^FCHI) index is down 2.3%.
After Greece, the eurozone country suffering most pain is Spain, which is, quite frankly, in a shocking state. With the Spanish economy shrinking by 0.3% in the final quarter of 2011 and again in the first quarter of this year, an unemployment rate of 24.4%, and house prices crashing by 50% or more, Spain's banks are basket cases.
Right now, Spain looks to be in as big a mess as bailed-out Ireland, but on a far bigger scale. For example, it's estimated that half of Spanish property loans (a total of 184 billion euros) have turned toxic.
Hence, the Spanish government has taken steps to shore up its major banks, taking a substantial state stake of 45% in Bankia, Spain's third-largest bank after Banco Santander and BBVA. However, Spanish banks may need capital injections totaling perhaps 30 billion euros, part of which may have to come from the state in the form of more partial nationalizations.
Nevertheless, until the Spanish government faces up to its chronic financial problems and seeks a safety net from the European Financial Stability Facility or the International Monetary Fund, Spain's pain is surely set to continue.
Credit where credit's due
Finally, one way to see these national strains is to compare the 10-year bond yields of the major economies. Here they are, from lowest yield to highest yield, courtesy of the Financial Times:
10-Year Yield (%)
While the U.K. is enjoying the lowest borrowing costs in the history of our state borrowing, Italy is paying a fixed yearly rate of nearly 6% to borrow over a decade. For Spain, this rate is 6.3%, while Portugal and Greece have to offer danger money to bond buyers.
Right now, investors seem to have eyes only for ultra-safe, low-yielding bonds issued by the likes of Germany, the U.S., and the U.K. Until this "risk off" mentality changes, share prices look set to go lower still.
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