Behind the selloff

The latest turmoil in Europe is overshadowing efforts to revive the US economy, indicating that markets will continue to struggle until the debt crisis in Greece and other EU nations is finally resolved.

Despite an oft-stated belief from economists that the problems in Europe's peripheral nations won't spread through the world's economy, investors are acting as if a tipping point is near.

"There's the sense that there is this denouement coming, that we're coming to some important event in Europe," said Quincy Krosby, market strategist at Prudential Financial in Newark, NJ "We've circled back to Greece."

Stocks sold off sharply Friday, driven primarily by worries that the European Union is unraveling.

Rumors that Greece was about to default on its debt-fiercely denied by the nation`s government-overwhelmed efforts the day before by US policy makers to assure that help was on the way for the domestic economy.

President Obama on Thursday evening unveiled a nearly half-trillion dollar jobs-creation programme, while Federal Reserve Chairman Ben Bernanke earlier tried to assure investors that the central bank would not let the economy sink.

The market took no solace from either presentation, selling off after the Bernanke speech and opening lower the morning after seeing the president`s plan.

"With the president's speech, yes, it was important for the market. But right now it`s more about Europe," Krosby said. "Overall there was nothing really new in that speech that had not already been telegraphed."

Much the same could be said for Bernanke's presentation in Minnesota.

"Anyone looking for confirmation that the Fed is preparing to act further...would have been a little disappointed by (Bernanke's) speech," Paul Ashworth, chief US economist at Capital Economics in Toronto, wrote in an analysis. "He noted that the Fed has a range of tools available to provide additional stimulus, but he didn`t expand on what those tools were or drop any hints that additional stimulus was definitely on the way."

With the inability of US policymakers to change the narrative, investors were left to revisit the troublesome nemesis of euro zone debt.

Despite repeated bailout efforts and attempts to devise creative strategies to forestall the problem, the idea has not gone away that widespread defaults are in the offing that will threaten not just the region`s health but elsewhere as well.

"The Eurozone authorities have always avoided the next crisis around the corner by strengthening their firepower despite initial political constraints," wrote Athanasios Vamvakidis, forex strategist at Bank of America Merrill Lynch. "However, with markets now concerned about Italy and Spain, the euro zone crisis could become systemic."

What scares investors most is that even if Congress passes portions of Obama's jobs plan and Bernanke`s Fed can stimulate growth with another round of easing, their efforts could be for naught should the euro debt crisis explode.

"Economic and financial headwinds facing the economy are so strong that they have rendered monetary policy ineffective," Daniel Aaronson and Lee Markowitz, principals at Continental Capital Advisors in New York, said in an analysis. "Therefore, the global debt problem, weak economic backdrop and corporate earnings will be the primary drivers of the stock market going forward."

Still, lawmakers in Washington pledged Friday to give Obama's plan a fair hearing.

Economists greeted the ideas with a broad level of scepticism, though, stating that the proposals to extend unemployment compensation, provide tax cuts for working-class families and give credits for small business job creation have been largely aired already.

The more ambitious plans, meanwhile, are considered unlikely to pass.

"Forecasters should thus see much of last night`s speech in a political light," Citigroup economist Steven C Wieting wrote. "However, to the extent that the president can generate popular support for added measures and to any extent that immediate fiscal tightening can be put off, it does offer the potential for incremental improvement in the US growth outlook, at least for 2012."

With little help for big leaps on the home front, investors then are pushed to look overseas at the ominous European debt overhang.

"It's an issue that we`ve been ignoring. We have a possible Greek default and there obviously still are issues in Europe and it could spill over to the US," said Andre Julian, senior market strategist at OpVest Wealth Management in Irvine, Calif. "If they don`t come up with a real solution that's more than rhetoric it`s going to continue to weigh down the global economy."