By Paul Dykewicz,
Wall Street Week Contributor
Editor, Eagle Daily Investor
It is important that investors avoid putting too much emphasis on the rhetoric of central bankers in Europe that has been fueling a rebound in the markets during the past week.
The driving force of the rise in stock prices largely is talk from central bankers that they will use easy-money policies to keep interest rates low and take other measures to promote economic growth. Such promises give a short-term boost to the stock market but the results can be fleeting.
Investors responded favorably to an Aug. 2 announcement by the European Central Bank’s Governing Council to consider taking steps to help euro-area governments sell new bonds. The statement triggered a rise in euro-area stocks.
David McAlvany, CEO, McAlvany Financial Group, said the European equities have been undervalued lately. He also cautioned that buying European stocks carries the risk of further devaluation of the euro, McAlvany said.
The European Central Bank’s (ECB) Governing Council’s statement reflects strong interest in adopting policies to intervene to reduce the price that European governments must pay to float bonds, as well as urging euro-area governments to pursue other avenues of assistance. The Governing Council advocated that member countries activate the European Financial Stability Facility (EFSF), which is designed to raise money by issuing debt and by distributing the funds to euro-zone countries that need to recapitalize their banks.
The council also addressed tapping the European Stability Mechanism (ESM), another vehicle to provide financial assistance to euro-area member states. Unquestionably, the council wants to aid the region economically and fiscally.
Investors interested in buying European stocks at bargain prices may have a window of opportunity to pursue short-term profits but they need to stay realistic in their expectations because the region remains under economic distress.
U.S. investors should understand that Europe’s “elite” tend to view the region’s “economic mess” through a political lens, McAlvany said. That perspective causes reluctance among key leaders to impose austerity measures in Greece, Spain and other nations, McAlvany added.
But economic pain is Europe does not seem to be abating. Greece, for example, remains a big concern.
The Standard and Poor’s credit rating agency downgraded its outlook for Greece to “negative” and explained that the nation’s deteriorating economy will cause difficulties for the government to pursue additional spending cuts. Any pullback from needed austerity measures could jeopardize the country’s next disbursement of funds from the international bailout package that it previously negotiated.
Paul Dykewicz is the editor of Eagle Daily Investor and the editorial director of the Financial Publications Group at Eagle Publishing Inc., of Washington, D.C. Eagle publishes four free investment e-letters, seven weekly trading services and five monthly investment newsletters, Forecasts & Strategies, Successful Investing, High Monthly Income, The Alpha Investor Letter and PowerTrend Profits.