After two days of stellar gains, the stock market was in "rest" mode Wednesday afternoon as traders tried to make sense of the latest developments out of Europe. (Update: After hovering near breakeven less than an hour ago, socks have taken a turn south. As of 2:10 p.m. EDT, the Dow was down about 100 points.)
On Monday and Tuesday, hope rose for new solutions to address Europe's sovereign debt crisis, generally, and the threat of a Greek default, specifically.
"Germany is prepared to provide every assistance that is needed," German Chancellor Angela Merkel said Tuesday during a meeting with Greek Prime Minister George Papandreou. "We want a strong Greece in the euro zone."
Then The FT reported on a "split" among EU members over terms of the latest Greek bailout and some of the enthusiasm dissipated. On Wednesday, major European bourses fell between 0.9% and 1.4% in reaction.
In addition, several observers noted that several EU parliaments have yet to ratify the July agreement to increase the size of the European Financial Stability Facility (EFSF) to 440 billion-euros (around $593 billion), much less recent chatter about expanding the fund to 1 trillion euros or more.
On Thursday, the German parliament is set to vote on the initial expansion of the EFSF, a vote which could have huge implications for the future of Angela Merkel's coalition government, if not the fate of the EU itself. So perhaps Wednesday will prove to be a bit of calm ahead of that potential storm.
"Ultimately, they're looking to build a 'ring of fire' around Greece," says Axel Merk, president and CIO of Merk Investments and manager of the Merk Funds. "They'll do whatever it takes — they'll give free money at some point -- but it has to be on German terms and they're not coming easily."
What's happening in Europe is a "dialogue between the bond market and policymakers," Merk says. "As the markets get at some point back into turmoil, the process will be accelerated. If everything looks fine, policymakers will think about something else. Then the crisis will ramp up again and policymakers will be ready to vote on something."
Merk describes this back and forth as an "ugly process," which is complicated by the political realties of the EU, which is made up of 17 distinct member states. Still, he compares Europe favorably to the U.S., which is one country struggling to get its fiscal house in order amid ongoing political dysfunction and partisan gridlock.
Against this backdrop, Merk expect continued volatility in the financial markets, with wild swings in both directions and former "safe havens" such as gold and the Swiss franc losing their luster.
"There is no such thing anymore as a safe asset," he says. Investors must "embrace that we live in a risky world and try to do the best with it."
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com
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