As the Spanish government may not have the leeway in the bond markets to provide this amount of funding without risking a spike in interest rates and threatening its own solvency, outside help is likely needed. Solutions are limited though, as eurozone bailout funds are currently prohibited from direct infusions into banks. Any "bad bank" proposal to off-load bad loans from balance sheets likely needs to have credible loss estimates and be mandatory in order to provide a lasting shot of confidence. Meanwhile, Spanish bank equity is being diluted by debt for equity deals.
European banks limit economic growth
Source: FactSet, STOXX. As of May 8, 2012.
A weak banking system is likely to rein in lending, the lifeblood of economic growth. This may already be playing out - the eurozone PMI in March and April reversed sharply downward, indicating Europe could continue to pressure global growth.
Global easing still ongoing
There are concerns about a repeat of 2011, but a key difference in 2012 is a nearly universal global downtrend in inflation. While last year, emerging market central banks had to raise rates to keep inflation under control, this year's growth slowdown is accompanied by an inflation "green light," with emerging market central banks joining developed markets in the rate cut party.
In just the past month, Brazil cut rates by 0.75% and India cut interest rates for the first time in three years. Additionally, Australia returned to easing after being on hold, and the asset purchase program by the Bank of Japan was increased.
Fall in food prices key for emerging markets
Source: FactSet, Commodity Research Bureau. As of May 8, 2012.
* Indexed to 100 = 5/7/2007. 25-day moving avg.
We believe inflation on a global basis will likely remain subdued this year. Food prices in particular have fallen, important for the growth economies in the emerging world, where food accounts for a disproportionate amount of the change in inflation. If inflation remains contained, central banks could to continue to provide stimulus, underpinning global economic growth.
Read more international research at www.schwab.com/oninternational.
Important Disclosures
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The S&P 500® index is an index of widely traded stocks.
Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Past performance is no guarantee of future results.
Investing in sectors may involve a greater degree of risk than investments with broader diversification.
International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
