China’s Vote of Confidence in the EU Boosts Global Markets

For those requiring further proof that the balance of power within the global economy has shifted to China and away from the US, today’s surge in the markets should provide ample evidence that change is afoot. Describing as “groundless” rumors that China was questioning its stake in European holdings, a statement posted on the State Administration of Foreign Exchange website noted that “Europe has been, and will be one of the major markets for investing China’s exchange reserves”.

Investors were so emboldened by this shot of confidence, the resulting buying spree lifted the Standard & Poors 500 Index back above 10,000 points soon after the market opened. The endorsement also helped reverse the euro’s slide that had been threatening to hit a four-year low.

Commodities also gained with crude for July delivery jumping 3.3 percent to $73.88 a barrel by mid-day trading in New York. This helped the Canadian dollar regain some of its recent losses to its US counterpart when investors abandoned the “loonie” for the perceived safety of the greenback earlier in the week. By 11:00 AM in New York, the Canadian currency was up more than a cent and half to 94.70 US cents.

China’s showing of support for the euro was without question, largely responsible for today’s new-found optimism, but events in Europe itself also contributed to the positive mood. Announcing plans to trim spending, two of the EU’s “problem children” were clearly hoping to send a message to investors – but also the EU and the International Monetary Fund – that they were confronting their respective budget gaps.

By a margin of a single vote, Spain’s parliament approved a plan that would reduce government spending by 15 billion euros (US$18.4 billion). Italy also recently outlined spending cuts totaling 24 billion euros (US$37.3 billion) over the next two years. It would seem that all it takes is an economic crisis of unmatched precedence, to help Europe’s chronic over-spenders see the light and take actions towards greater financial responsibility. If only that were true.

Unfortunately, I believe it is a little early to proclaim that Italy and Spain have seen the light. The measures barely received government approval in Spain, and Italy’s Prime Minister Silvio Berlusconi is also facing pressure at home to ease up on all the talk about spending cuts. We’ll see how resolute the respective leaders are if and when they face the same level of public outcry witnessed in Greece.

2009 Deficits

Italy

• 46 billion euros (US$56)
• 5.3% of GDP
• Spending cuts = 24 billion euros over two years

Spain

• 100 billion euros (US$122)
• 11.4% of GDP
• Spending cuts = 15 billion euros

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