Financial markets were in retreat Monday as traders reconsidered the wisdom of a 5-week rally that culminated in the Dow's best month since 1974.
Over the weekend and overnight Monday, concerns about the viability of Europe's latest bailout plan dominated conversation among traders after China's official Xinhua news agency on Sunday declared: "China can neither take up the role as a savior to the Europeans, nor provide a 'cure' for the European malaise. Obviously, it is up to European countries themselves to tackle their financial problems.''
Those comments poured cold water on the idea of China playing a big role in boosting the European Financial Stability Fund, as had been the hope last week. An accompanying rise in yields on Italian and Spanish sovereign debt triggered a bill sell-off in European markets, which spilled over into U.S. trading. With the bankruptcy filing of MF Global and a weaker-than-expected Chicago CPI report further adding to negative sentiment, the Dow was recently down 1.1% while the S&P 500 was off 1.4% amid notable weakness in financials.
Monday's slide notwithstanding, the market has been in ebullient mood lately, largely based on the idea that European officials will avoid the Lehman-like Armageddon scenario and that the U.S. economy is stronger than feared. Financial markets will wax and wane daily depending on whether the latest news supports or challenges such views.
On a related note, a new Nielsen Survey shows 60% of global consumers say now is not a good time to spend while 33% of North Americans and 20% of Europeans say they have no spare cash.
Consumers may say they don't want to spend and consumer confidence may be in the pits, but actions speak louder than words. In the third quarter, at least, a falling U.S. savings rate and continued spending by the wealthiest Americans helped GDP rise to 2.5% vs. a paltry 0.9% in the first half of 2011. Whether struggling consumers -- or the top 20% -- can keep the economy afloat remains a huge unknown.
As if strapped consumers don't pose a big enough threat to the fragile global economy, governments around the world are adopting austerity measures in what BlackRock's Peter Fisher calls "a competition in virtue."
With governments policymakers (and voters) debating the merits of austerity vs. more stimuli, the global economy hangs in the balance, as Henry and I discuss in the accompanying video.