Fear and confusion paralyse markets

Germany's chancellor, Angela Merkel, and France's president, Nicolas Sarkozy
Image caption Stock market investors are as confused as ever, in spite of all the efforts made by Europe's politicians to sort out the mess

Looking at the graph of most of the major equity markets over the past two and a half months, I have often been reminded of a ball bouncing along the inside of a tunnel, unable to escape its narrow range.

Another simile has now occurred to me - the path of a rabbit in front of a car's headlights.

To be fair, the announcement of the eurozone agreement last week allowed the the rabbit to dive into the verge - only for it to dart back this week in a suicidal zig-zag in front of the wheels of the approaching juggernaut.

The reason for the markets' return to the recent trading range is the same as the unfortunate bunny's.

Neither seem to have a clue what's going to happen - or where it is safe to hide.

Moving on

The fear in the markets obviously centres around the unravelling of last week's Brussels agreement.

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But the equity markets were slow to get the picture.

While they were cracking out the champagne and leaping upwards as Germany's chancellor, Angela Merkel, and France's president, Nicolas Sarkozy, shook hands and smiled, the bond markets knew exactly what was going on.

Within hours of the agreement being announced, the Financial Times reported that the European Central Bank was intervening again in the Italian government bond market.

Italian bond yields continued their upward trajectory as investors marked down bond prices.

Unless Greek Prime Minister George Papandreou had already somehow let slip what he was about to do, the markets were not thinking about Greece.

They were already throwing cold water on the European Union's magniloquent announcement and targeting Italy.

Still spending

Furthermore, when MF Global went under, it had negligible exposure to Greece.

The bulk of its portfolio at the end of September was as follows: Italy (51%), Spain (18%) and Portugal (16%).

Beyond the chaos in Greece, the fear in the market is that the resources so loudly proclaimed last week to be ready to defend the eurozone, will not be up to the task of supporting Italy.

The question that might well be asked is that with all this gloom about, why have the equity markets not collapsed completely?

They may resist rising, but they also refuse to fall.

Stephen Pope, managing partner at the financial research boutique Spotlight Ideas, believes the resistance levels are maintained by a thread of strong, big companies still reporting solid profits.

"There is a sufficient number of heavyweight companies in many areas of the world that are coming out with good numbers and which are still encouraging people as the markets fall," he says

Mr Pope specifies resource stocks, miners and oil companies in the UK, chemical and heavy engineering groups in Germany and chemical and pharmaceutical companies in France.

Image caption Investors eye Mr Papandreou's every move

In the US he identifies some of the biggest and strongest banks, as well as the resource and high tech companies.

"As an example, take a look at Mastercard, which has just reported a tremendous set of earnings and is now trading at its highest level ever," Mr Pope says.

"It seems even at this time there are people out there who want to go on spending, and there are companies that will benefit."

Still growing

Last month, I wrote that in an environment of low to zero growth corporate profits will start to suffer. Indeed profits are in aggregate not growing as fast as they were.

Analysts' expectations have been steadily lowered over the past six months and are likely to be lowered further.

But the resilience of the corporate sector has been remarkable.

According to Bloomberg research the number of negative surprises for analysts watching third quarter results was roughly the same as last year - about 20% of all companies reporting.

The relief that it wasn't worse was one of the reasons why the US S&P500 had its best month in 20 or so years.

There is some confidence that while it's unclear where the euro crisis will end, meltdown is not on the cards.

Mr Pope believes that China and India will continue to provide growth, as they rebalance their economies and nurture domestic demand.

"With all the talk of having seven billion people on the planet, you can't ignore the opportunities that will bring," he says.

"Demand may not be going gangbusters as it has over the last decade, but there's no reason to think it will collapse either."