For all the criticism of the Europeans on how they’ve conducted their financial affairs, the one that has been most vocal since the euro was created was that a monetary union without a fiscal one would just not work. It proved to be true and today the EU summit seems to be intent on fixing that. Of course though, the horse (debt problem) is already out of the barn and now doing a Kumbaya is not going to all of a sudden change the growth and debt trajectories of these countries. And while a new EC commission will oversee EU budgets, the Europeans have quickly learned that there ultimately is no better oversight than the bond market in enforcing a change of behavior. Also, the 200b European central bank loans to the IMF will be set in stone. The other hope for the IMF is that the new European face of fiscal union can be attractive to non European countries to lend more money to the IMF. The main problem I have with the agreement is the EU will no longer force bondholder losses and will instead have them be voluntary. Playing nice with bondholders is all well and good in the short term but debt writedowns should be the consequence of bad investments. The other story of the morning is China. The Shanghai index fell for the 6th day in the past 8 to the lowest since Mar ’09. While CPI rose just 4.2%, the slowest pace since Sept ’10 and PPI gained at the slowest rate since Dec ’09, the thought is the main reasoning is economic slowing more than anything else as IP rose 12.4%, the weakest since Aug ’09. The bright spot was a better than expected Retail Sales figure.
We are now beginning to see the collateral damage of the events in Europe with the earnings guidance cuts from TXN last night and DD and LSCC this morning. TXN said “the reductions (in rev and eps) are due to broadly lower demand across a wide range of markets, customers and products, except for Wireless applications processors.” Lattice blamed “softening of demand primarily in the communications business in December.” And, Dupont said “we are seeing slower growth in certain segments during the 4th Q, driven by global economic uncertainty. This uncertainty is contributing to ongoing conservative cash management in some supply chains.”