Market Outlook: Bumpy Bull Ride Ahead
Both developments have heightened concerns about whether the two countries will be able to handle their struggling banks as well as their debts. As a result, interest rates for Spanish and Italian government bonds have edged higher over recent days.
But the damage won't be as deep as in prior years. Borrowing costs for Spain and Italy remain far below levels reached last year, thanks to the European Central Bank's pledge to stand behind the hardest hit countries and protect the euro currency. Last July, for example, the cost for Italy's government to borrow from the bond market for 10 years topped out at 7.5%. On Friday, after creeping higher all week, it was 4.5%.
The European debt crisis no longer has Wall Street's investment banks on a leash. Back in October 2011, fears that Greece would be unable to get another lifeline from lenders helped push Goldman Sachs's stock as low as $84.27. It's now $151.11.
Jeffrey Kleintop, the chief market strategist at LPL Financial, says the ECB's pledge largely removed the prospect of a financial crisis spreading from Europe to the rest of the world.But even though the scariest threat is gone, Europe's economic troubles still pose a risk. If Germany, for instance, gets pulled into a recession with the rest of the region, the pain is bound to spread, Kleintop says. Added together, the 17 countries that use the euro rank as the world's second-largest economy. Europe is also China's top customer for exports. The other major concern for investors stems from Washington, where drawn-out budget battles have turned into an annual event. Steep spending cuts are scheduled to kick in on March 1, unless Congress and the White House find a way to avoid them. Previous high-stakes talks have rattled financial markets. In August 2011, a fight over raising the government's borrowing limit ended with the country losing its top credit rating and panicked investors fleeing for safety. Worries that lawmakers would fail to avoid budget cuts known as the "fiscal cliff" were blamed for the stock market's swoon last fall.
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