Markets Stalled after Recent Run

Equity markets in Asia and Europe posted losses again this morning. Last week’s rally across equity and commodity markets seems to be taking a bit of a  breather at the moment as the focus of markets returns to structural problems in Europe, fiscal problems in the US, and waning global aggregate demand.

The ZEW  survey of German investor sentiment was the highlight of data from Europe this morning. In the short term, sentiment is at a two-year low; but looking forward, six-month sentiment actually rose from last month, coming in at -18.2. 

This morning the market saw more dark details of just how much more pain potentially remains before the debt crisis in Europe finds any sort of lasting solution. First, German Chancellor Angela Merkel commented that the long-term European Stability Mechanism (ESM) cannot be used to recapitalize banks without the establishment of a formal banking oversight committee, which would take at least another year to complete, and create delays in responding to requests for aid.

Second, a report was released stating that euro zone banks have not reduced the size of their of balance sheets as they had pledged to do last year. In fact, their balance sheets have grown by 7%, due in part to the cheap financing being offered by the European Central Bank.  The pledge to reduce the amount of assets held and increase capital was in response to fears over short-term funding requirements. That the central bank stepped up to meet that concern via unorthodox policies, rather than banks following through themselves, may be a cause for concern going forward.

North American data was light today, with the US releasing its current account reading for Q2, which came in at a deficit of $117 billion, a decrease from Q1's deficit of $136 billion.  Exports of goods, services, and investment income to foreigners outpaced the amounts imported. 

Alongside the current account, the US Treasury released July data for long-term securities purchases, which showed a net inflow of $67 billion into US capital markets for the month. This data did little to move markets, however, and equities remained lower while the USD stayed slightly stronger.

Thursday will bring a snapshot of global aggregate demand with the release of a slew of purchasing manufacturing indices from a number of major economies. Those from Europe are expected to indicate a contraction, while the US is expected to expand (ever so slightly).