Dollars and Sense: Overseas drama rattles the markets

Overseas turmoil. The big stories last week were Greece and China, and both stories continue to unfold. First Greece. A week ago yesterday, the Greek people voted to reject austerity measures. The next day, the Greek finance minister resigned. Greece is officially in default. But negotiations continued, and by the end of the week there was new hope Greece might be able to get some sort of a deal with the European Union. This morning, that deal finally came together, although the Greek government still has to impose unpopular austerity measures to get its bailout funds.

Bad news or worse news. Despite the deal, things don’t look that great for Greece, which is suffering from terrible financial problems that have brewed for years. A large percentage of the population live on government-backed pensions, so there is a disincentive for older people to work. Unemployment stands at about 25 percent, as bad as it was in the United States during the Great Depression. The gross domestic product in Greece has fallen by about a third since 2009. That sort of a drop just doesn’t happen in a developed country, except perhaps after a war. So, deal or no deal, Greece remains in big trouble. The only question at this point is whether the Greek crash will scatter debris on the rest of Europe.

China collapse. In the past month or so, since the beginning of June, Chinese stock prices have fallen by about one third. The key reason for the decline has been the slowing growth of the Chinese gross domestic product. But that’s not news, as it’s been happening for the past few years. What’s new is a growing lack of confidence on the part of the Chinese people and unsustainable fiscal policies that, for example, doesn’t let the Chinese currency float on the global markets. Whatever the causes of this current stock collapse, it has had more global impact than the Greek troubles. The slowdown in China also had a big impact on commodities prices. Copper, coal, natural gas, and iron ore are all at or near 2015 lows.

Meanwhile, back home … The news here seems almost pale in comparison to all the drama overseas. Last week, the situation was steady-as-she-goes here. And new data from the Institute for Supply Management said the pace of growth in the U.S. services sector increased in June.

A glitch in the markets. The only real drama came when we experienced a trading “glitch” on the New York Stock Exchange (NYSE) that shut down trading there for a few hours on Wednesday. I put the word “glitch” in quotation marks, because that’s what everyone called it, even though the true nature of the problem wasn’t known for several hours. When the NYSE shut down, the news instantly flashed on every major news service. Counterterrorism and homeland security adviser Lisa Monaco and chief of staff Denis McDonough immediately briefed President Barack Obama. A statement from the FBI said the agency had offered assistance to NYSE officials. A major technology problem at United Continental just hours earlier caused that airline to ground stop all flights, so some analysts feared a coordinated cyber-attack. The two events turned out to be not so much a coordinated attack, but a vivid reminder of how much we depend on software these days. In the case of the NYSE, it turned out a software upgrade didn’t perform as expected, and it shut down the system. It’s important to note the markets often have these trading shut-downs for various reasons. Sometimes they last just a few seconds to a minute or two. This one was unusual only in its duration. It’s also important to note that with so many competing markets, stock trading proceeded pretty normally on other exchanges, and the NYSE re-opened before the end of the day without any additional problems.

The week ahead. Believe it or not, we’re back into earnings season. Beginning next week, U.S. corporations will start releasing their earnings reports. As of today, even after a big rise on Friday, the Dow is about 500 points below its record high set in May and below where it started the year. That’s caused some analysts to say stocks may be undergoing a long-anticipated correction, just a slow-moving one. But even with the decline, the price-to-earnings ratios are still well above historical means. If we don’t see a very strong earnings season, lots of analysts think we’ll get that correction we’ve been waiting for.

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