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While you were sleeping: Renewed euro rescue plans

Tuesday 29th November 2011

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Investors welcomed renewed efforts by European Union leaders to check the escalation of the sovereign debt crisis.

Europe's bailout fund, the European Financial Stability Facility, might insure the bonds of fiscally troubled nations with guarantees of 20 percent to 30 percent of each issue, depending on financial markets, according to the fund's guidelines that finance ministers will discuss this week, according to Bloomberg News.

Meanwhile, American consumers provided a bright note as well as the US enjoyed a record US$52.4 billion in sales over the Thanksgiving weekend, a 16.4 percent increase from a year ago. The data, adding to the recent signs of resilience in the world's largest economy, boosted appetite for retail stocks.

The Dow Jones Industrial Average jumped 2.72 percent, the Standard & Poor's 500 Index climbed 3.10 percent, while the Nasdaq Composite Index gained 3.52 percent.

"The mood has changed over the weekend on hopes for progress toward a lasting resolution to the building debt crisis," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, told Reuters. "Investors seem happy enough to take risks despite the fact that little has been substantiated this morning."

Europe's Stoxx 600 Index ended the day with a 3.6 percent advance as Germany and France were working on plans for a fiscal union before an EU summit on December 9.

The summit is perceived as potentially the last chance to rescue the common currency.

"We are working intensively for the creation of a Stability Union," Reuters reported, citing a statement by the German Finance Ministry. "That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits."

Despite the desperate hope and desire that progress is indeed being made, there's still plenty of caution too when it comes to the direction for equities.

"An oversold trading opportunity is likely pending this week, given short-term indicators are increasingly oversold, but the longer-term technical background is increasingly at risk," Robert Sluymer, analyst at RBC Capital Markets in New York, told Reuters.

No one underestimates the challenge ahead. The Organisation for Economic Cooperation and Development said today that the EU's debt crisis posed the biggest threat to the global economy and that a break up of the euro zone could no longer be ruled out.

"There is a risk to the euro, let's not deny that," OECD chief economist Pier Carlo Padoan told Reuters in an interview. "But I would like also to say that there is a possibility of avoiding that risk."

The OECD said world growth would ease to 3.4 percent in 2012 from 3.8 percent this year, down from its May forecast of 4.2 percent this year and 4.6 percent in 2012.

Separately, Moody's Investors Service issued its own dire warning, saying that the crisis was putting all European government bond ratings at risk.

"While Moody's central scenario remains that the euro area will be preserved without further widespread defaults, even this 'positive' scenario carries very negative rating implications in the interim period," the ratings agency said in a report.

While US data have recently provided indications that the recovery is gaining traction there, the housing market remains sluggish at best.

New home sales in the US rose 1.3 percent last month to a 307,000 annual pace, according to Commerce Department data. That fell short of the median forecast of 70 economists surveyed by Bloomberg News for a 315,000 rate.

Demand is on pace to reach 301,000 this year, less than the 323,000 homes sold in 2010 that were the fewest since data-keeping began in 1963.

Even so, some analysts are optimistic that the worst might be over as the pace was the best in five months.

"This looks like a bottom. The market is stabilising," Gregory Miller, an economist at Suntrust Bank in Atlanta, told Reuters.


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