Having played pass the parcel with the worlds debt problems since the financial crisis in 2008 erupted with the collapse of Lehman Brothers, the bundle has now reappeared as sovereign debt. The latest attempt to hide the problem is through the ECB and probably next through the IMF.
Attempts at austerity don’t match the political voting system so without the traditional inflation package to reduce the problem it will prove some struggle to solve.

The question is when will the debt problem drop out of the headlights for the worlds stock markets. Whilst every effort is being made to divert attention it will keep popping up as governments attempt to refinance their debt and push the problem further down the line.

However it is part of the world economy and once perceived as manageable it will go away…until the next time.

The Financial crisis of 2008 created by irresponsible lending to institutions and individuals alike is even more visible with the current sovereign debt  crisis in Europe. Any debt write off has implications for the lender,  and currently that is the the worlds banks and their shareholders, us.

Austerity is the watch word as an attempt is made to tackle the problem. What is needed is a growth package but the conundrum is how to have growth and austerity, hence the quantative easing programme.

The difficulty for markets at the moment is deciding between depression, recession, stagflation or weaker economic growth. At the same time the worlds second largest economy, China, is growing  at over 9 % per annum , all very confusing.

In the Far East, China and India have been raising interest rates to subdue inflation whilst in the US the Federal Reserve continue with expanding the money supply.

Whilst it must be good news that the policy is working markets have been comforted with this approach enjoying the historically low rates and are nervous of this prop being removed.

In Europe the sovereign debt issues present interest rate problems. France and German economies are booming and probably need interest rate rises, whilst Greece, Ireland Spain and Portugal need economic stimulus and low rates.

The theme for 2011 so far has been for Emerging markets to struggle with 10% falls in South Africa Peru Chile and India whilst several European markets have gone the other way. Inflation as a consequence of quantative easing is the real concern and China has been raising rates to combat this.

In the UK the risk of stagflation is making it difficult for the Bank of England to react with interest rate rises but they will come soon. Whilst retail struggles, manufacturing is improving but the worry is that the weak pound has failed to support exports. Sterling is starting to appreciate in anticipation of dearer money.

Markets have gently been climbing since mid September as economic fears subside and an element of optimism has been injected by US economic data which has been steadily improving.

On Christmas Day the Chinese authorities raised interest rates as the huge surge in growth has fuelled inflationary pressures which they needed to address.

As China has been providing the engine for the economic recovery there are fears that any significant slowdown will be felt across the world.

The reaction from the Far East has so far been positive with the markets returning in buoyant mood.

Despite all the economic problems in Europe with the countries debt mountains, the German economy has been experiencing a boom time as can be seen by the performance last year of the Dax.

Whilst governments are in a mess the stockmarket does not necessarily reflect the state of the domestic economy. The FTSE 100 companies for example earn 75% of their earnings from abroad.

Most fund managers are optimistic for equities this year as companies get there balance sheets in shape, dividend payments are set to rise and corporate activity builds up.

If the US can continue to recover and employment increases then 2011 should  see a continuation of the 2010 economic recovery.

There have been definite signs of economic improvement in the USA and UK whilst in Germany economic growth has been very strong.

In the Far East concerns over interest rate policy in China has made the Chinese domestic market volatile to say the least with 5% daily swings in both directions.

Just as everything appeared to be improving the European zone revisited the sovereign debt  problems created by the financial crisis in 2008. The debt parcel landed firmly in the Irish governments hands as refinancing Irish banks speculative property lending proved a problem.

The result is a massive EU rescue package has been announced in an attempt to shore up confidence in the Irish financial system.

Portugal and Spain have similar problems and the Euro is taking the brunt of these concerns.

Stockmarkets love an excuse to have some volatility and duly obliged with most markets falling sharply during the “uncertainty”.

As expected they have decided to recover very quickly over the last two trading sessions  as more positive economic data surfaces.

No doubt this volatility will resurface as the next round of refinancing looms for the different European states and the market speculates on the outcome.

In the mean time lets hope for a continued year end rally as fund managers look to next year’s gains.

The markets have supposedly been rising as they anticipate further quantitative easing  from the US and UK central banks which is a short term fix and are now nervous that this might not be necessary (actually a good thing).

This speculation is having the greatest impact on currency markets with the dollar sliding against the yen and pulling sterling down with it.

Commodities, especially gold as central banks increase their gold reserves, have been the main winners creeping ever higher. Chinese and Indian growth figures are still spectacular at 9and 8% whilst Germany the economic power house of Europe reported the lowest unemployment in 18 years a sign that they are well on track. Everyone is still after that elusive export led recovery from a weak currency, clearly not a universal option.

Banks in the UK are being criticized for selectively not lending to spur economic growth whilst we suffered so badly when they said yes to anything.

BP have indicated that dividends will return soon , Schroder’s are anticipating a rising stockmarket in 2011 and the current bout of US statistics all indicate improvement in manufacturing and GDP output.

In the Far East and emerging economies continued strong growth which will hopefully continue to pull Western economies along is being checked with interest rate rises as inflationary pressures build. In India inflation in excess of 8% has pushed interest rates to 6%.

Demand for safe investments have meant that the most popular investment over the last few months have been gilts and corporate bonds which will eventually suffer from rising interest rates. Whilst continuing sovereign debt issues dominate today’s papers and there are still calls for continued quantative easing, the tide may be turning as the improvement is stronger than anticipated.

Comments from Brazil this week, concerning currency movements turning into a trade war, are not far off the mark. Most economies want a weaker currency to help an export lead recovery but they can’t all be weak.

The housing market is not lending any support and the US market has dropped sharply over the month dragging most markets down with it.

Whilst everyone is agreed that economic growth in the US and Europe is weak with interest rates low and quantative easing yet to spark any significant growth, the worry is there is little central bank ammunition left for more help.

In the east and emerging markets growth continues to be strong and the Chinese economy officially overtook Japan as the Worlds second largest economy. Even these markets have been subdued in August joining in with the general malaise.

The Japanese yen has again been the safe haven currency whilst ironically the Japanese stockmarket has crumbled reflecting the weak political and economic climate. Germany on the other hand had extremely good growth figures and is providing the engine for European growth.

 However at the same time company profits have been quite strong both in the US and the UK with banks especially recording sparkling profits.

 Markets have become very fickle and have sharply rebounded in the last couple of trading sessions as US manufacturing improved sharply again this month, all very confusing

The stress tests for the European banks came out better than expected restoring confidence in the Euro which moved up 10% against a weaker dollar.

Sterling has also strengthened against the dollar and the yen along with the euro.

Here in the UK the bank reporting season has produced strong results from the major banks and this has pushed the FTSE 100 index back above 5300.

Manufacturing continues to improve in the UK and US and last night better than expected employment figures in the US improved confidence.

The economic recovery is still considered fragile and every piece of economic data is being scrutinised and analysed for evidence of a potential double dip or recovery.

Companies however continue to report improving trading conditions and with the Federal Reserve and the Bank of England continuing with very low interest rates to balance the increased taxation the recovery should continue.

Markets will have more to contend with if interest rates start to rise sooner than expected to contain demand and inflation.

Most current predictions are for interest rates to remain low for the rest of this year.

The Bank of England has kept interest rates on hold again this month