Plunging European markets and a loss of control by the European Central Bank (ECB) over the sovereign bond market in the euro zone foretell a difficult post-Labor Day market in the U.S., said PIMCO's Mohamed El-Erian in a commentary on Monday.
Citing that day's plunge of bank stocks on the European bourses because of the massive amount of debt they hold, El-Erian, PIMCO’s CEO, said it was a reflection of the ECB's loss of control over the yield on the 10-year Italian bond. He said it was still to be determined whether the ECB permitted the yield to increase—it hit 5.5% on Monday, although the ECB had been working to keep it at or below 5%—or whether the ECB itself had become overwhelmed by market dynamics. One thing, however, he adds, is clear: European markets are in trouble.
Pointing toward a diversity of comments from European politicians and policymakers, he added that the resulting conflict and confusion from so many disparate points of view "hurts, and does so materially." Not only that, he said, but the U.S. markets in their current fragile state will be influenced by the goings-on in Europe, particularly this week, in which President Barack Obama is scheduled to make a “‘mission critical’ speech on the American economy.”
Europe's condition makes Obama's efforts to deal with the unemployment and growth crisis even more important than it already is, he added, "and does so by raising both the stakes and the challenges for the president." He concluded with a warning to "Tighten those seat belts. It will be a bumpy and volatile week as markets are held hostage to policy developments in both America and Europe."