September 19, 2011 The Week Gary Thayer, Chief Macro Strategist Sentiment improves as policymakers address problems The U.S. stock market rallied last week as concerns about the European debt crisis eased slightly. European debt problems remain a long-term threat to the global economy but at least for now, central bankers have agreed to ease a dollar shortage. This reduces the risk of a near-term liquidity crisis. A week ago investor sentiment was very negative. The Europeans have been trying to address At the beginning of last week, the U.S. stock Greece’s debt burdens for several years. The goal market was testing the early August lows while has been to work through the problems over time. several European stock markets were making new However, when investors fear that the problems 2011 lows. This stock market weakness showed are getting more severe, a liquidity crisis can that investors were reducing risks by decreasing develop on top of the long-term funding problems. exposure to European debt problems. Of course, a liquidity crisis can aggravate the long-Unfortunately, reducing investments in Europe term problems, reducing the chances of working reduces the supply of dollars to European financial through those problems. institutions. This drop in funding could have created a liquidity crisis if policymakers had not For example, as investors reduce their exposure to acted. The good news is policymakers recognized European debt problems, ...
The Week Gary Thayer, Chief Macro Strategist Sentiment improves as policymakers address problems The U.S. stock market rallied last week as concerns about the European debt crisis eased slightly. European debt problems remain a longterm threat to the global economy but at least for now, central bankers have agreed to ease a dollar shortage. This reduces the risk of a nearterm liquidity crisis. A week ago investor sentiment was very negative.The Europeans have been trying to address At the beginning of last week, the U.S. stockGreece’s debt burdens for several years. The goal market was testing the early August lows whilehas been to work through the problems over time. several European stock markets were making newHowever, when investors fear that the problems 2011 lows. This stock market weakness showedare getting more severe, a liquidity crisis can that investors were reducing risks by decreasingdevelop on top of the longterm funding problems. exposure to European debt problems.Of course, a liquidity crisis can aggravate the long Unfortunately, reducing investments in Europeterm problems, reducing the chances of working reduces the supply of dollars to European financialthrough those problems. institutions. This drop in funding could have created a liquidity crisis if policymakers had notFor example, as investors reduce their exposure to acted. The good news is policymakers recognizedEuropean debt problems, firms that are dependent the increasing risk of a liquidity crisis and movedon investments from foreign investors need to find to diffuse it. As the week progressed, sentimentother sources of funding. If a gradual rebalancing improved and the stock markets rallied again.of investments away from risk turns into a wave of liquidations,then European financial institutions The weakness in the stock market during the pastmay not have enough liquidity to meet the demand three months shows that many investors continuefor funds. In order to prevent a liquidity shortage, to worry about another financial crisis. In 2008,central banks in Europe and the United States, defaults on housing loans created losses for U.S.pledged late last week to provide dollar loans to financial institutions. Today, investors’ concernsoffset the reduced funding from investors trying to are focused on European debt problems, especiallyreduce exposure to European problems. Greek debt.The 2008 experience showed that there can be two parts to a financial crisis. The firstThis pledge to provide dollars does not resolve the part is the longterm solvency problem created bylongterm European debt problems, but it does highdebt levels and the potential losses on loans.reduce the risk of the longterm problems The second is the potential for a neartermcascading into an immediate crisis when U.S. liquidity problem created by investors trying toinvestors are reducing exposure to European avoid the longerterm problems.financial institutions.
Please see page 3 of this report for Important Disclaimers
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The Week
September 19, 2011
source: HaverAnal ticsWellsFar oPast performance is not a guarantee of future results This week’s chart looks at the S&P 500 during thethe ECB to cut interest rates at its next policy past few years. The recovery in the U.S. stockmeeting in early October. Moreover, the Federal market during the past week is an encouragingReserve could provide more support to the U.S. sign that markets are stabilizing after the shock toeconomy by extending the maturity of the confidence this summer. In addition, the upturn insecurities that it holds in its portfolio. This decision the stock market this past week suggests that thecould come on Wednesday of this week. fear of a financial crisis and recession has decreased as policymakers offset the neartermIn summary, it is too early to declare that the funding shortages.downturn in the stock market this summer is behindus. However, the reversal in sentiment this In addition to providing increased dollar funding,past week suggests that investors are slightly less the European Central Bank (ECB) has indicatedworried about a financial crisis because central that inflationary pressures are decreasing asbanks are taking action to address the European economic activity slows. This opens the door forfunding problems and the slowdown in the global economy.
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The Week
September 19, 2011
Important Information, Risk Factors and Disclaimers: Past performance is not a guarantee of future results. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value. An index is not managed and is unavailable for direct investment. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuation and political and economic changes.This may result in greater price volatility. Wells Fargo Advisors is a trade name for certain broker/dealer affiliates of Wells Fargo & Company; other broker/dealer affiliates of Wells Fargo & Company may have differing opinions than those expressed in this report. Contact your Financial Advisor if you would like copies of additional reports.