In 2011 investors had a lot to worry about. The euro zone crisis, credit rating downgrades, slowing growth, crisis in North Africa and the tragic nuclear and natural disasters which hit Japan all led to a relentless 12 months of market volatility.
Those returning to work this morning are wondering whether the volatility continues and whether the euro zone debt crisis will continue to drive it.
It remains to be seen if the euro zone and its policy makers can find a meaningful solution to a crisis which has taken down governments, driven borrowing costs to unsustainable levels in the euro zone’s periphery and reignited fears of a banking crisis.
Having given a boost to market confidence in December by pumping nearly half a trillion euros into the banking system while snapping up billions of euros worth of peripheral bonds in the secondary market, Mario Draghi, the President of the European Central Bank, gave the market some breathing space over the holiday season.
The ECB intervention has helped ease market tensions, lowering borrowing costs for Spain and Italy while helping to boost stocks in the last few weeks of the year.
The question facing investors in 2012 is whether the ECB – by offering cheap money in return for risky assets held by the banks and buying up Spanish and Italian bonds in the secondary market - offers the beginning of a lasting solution to the debt crisis or it has simply put a plaster on things for a couple of weeks.
Billions of euros worth of debt from the banks and euro zone governments need to be refinanced over the first few months of the year and Draghi himself said in December this will bring things to a head.
“The pressure that bond markets will be experiencing is really very, very significant if not unprecedented,” said the ECB boss. The action he took to restore calm in December has helped, but it is very difficult to say whether the central bank will save the day.
“The outcomes here are binary: we could see a worst-case scenario of a collapse of the euro zone and a severe credit crunch, but also a world in which the ECB starts large-scale quantitative easing and Germany agrees to issue [joint euro zone] Eurobonds,” Garry Evans, the chief global equity strategist at HSBC wrote in a research note on Tuesday.