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Economic Review

5/25/2010

So why does the chaos in the EURO Zone effect US markets?  There are actually a number of reasons and one of them is the Japan connection.

Despite the approved bailout by EURO Zone leaders to address the Greek economy, uncertainty, volatility and chaotic conditions continue to prevail in the EURO currency, Equity and Fixed Income markets. The latest contagion of this turbulence has impacted the Spanish banking sector. 

The result has been continued pressure on US Equity markets as the gains posted during last week's rebound from the lows set in the major Indexes have been quickly eradicated.  So why the connection of turbulence in the EURO Zone to volatility in US markets?  One evolving factor is the Japanese connection.  Continued turbulence in the EURO Zone  will no doubt negatively impact overall economic growth in the region which will include decreased demand from the biggest economies of Germany and France.  These markets provide a significant outlet for Japanese goods.

Unfortunately the Japanese economy has been sputtering for quite some time, as it is mired in debt as well.  So a slow down in the EURO Zone will exacerbate problems in Japan, which has already been evident in the declines posted in the NIKKEI.  This in turn does not bode well for funding of US debt, as Japan has historically been an aggressive purchaser/holder of US sovereign debt.  So the bottom line remains that unfortunately a EURO Zone problem is a US, Japanese, Chinese, etc problem.

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