World Week Ahead: Europe's do-or-die summit

Monday 5th December 2011

After a superb week for equity markets on both sides of the Atlantic, investors are optimistic but also wary about whether Europe's leaders will yet again spoil the party if they show a lack of resolve in what is being seen as a do-or-die effort to contain the euro zone's fiscal crisis.

All eyes are on the Dec. 9 summit where hopefully agreement is reached on a new fiscal union that provides the necessary incentives - penalties - to encourage individual member nations to live within their means. If that is the result, then the pressure on euro zone government bond yields should ease from their recent highs.

There's plenty at stake. Success is not only deemed necessary to save the euro but also to prevent the global economy from slumping into recession.

"We've been led down the aisle so many times we're afraid the groom's not going to show up again," Nicholas Colas, chief market strategist at the ConvergEx Group in New York, told Reuters.

"There's an increasing expectation that when leaders meet they will have the framework of a resolution that will allow greater fiscal unity and some beginnings of a resolution to the European debt crisis," Colas said.

Optimism prevailed last week as Wall Street had its best week in almost three years. For those five days, the Standard & Poor's 500 Index climbed 7.4 percent, the Dow Jones Industrial Average added 7 percent and the Nasdaq Composite Index advanced 7.6 percent.

Europe's Stoxx 600 Index gained 8.7 percent. And the euro posted its first weekly increase in five against the greenback. The outlook for the euro though is tenuous. There's the summit and there's also an expectation that the European Central Bank will cut interest rates when its policy meeting is held on Thursday.

This week is crucial for all that is the euro zone. On Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet to work on a common proposal for Friday's summit.

US Treasury Secretary Timothy Geithner will fly to Europe for talks with German, French, Spanish and Italian leaders and officials. Geithner will meet Sarkozy, Italian Prime Minister Mario Monti and ECB President Mario Draghi during his Dec. 6-to-Dec. 8 trip.

The Treasury secretary will hold “discussions with his counterparts on their efforts to reinforce the institutions of the euro area,” according to a statement from his office reported by Bloomberg News.

Plenty of scepticism remains, too.

Friday's meeting "is the fifteenth summit we've had now during the euro zone crisis, and every one the market gets excited and then boom - it gets disappointed," Ken Polcari, managing director at ICAP Equities in New York, told Reuters.

A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros (US$270 billion) to combat the crisis, Bloomberg news reported on Friday, citing two people familiar with the negotiations.

Even so, "no amount has been discussed at the political level," one senior euro zone official involved in the talks said, according to Reuters on Saturday. "Discussions are only starting at the technical level, so right now any number is pure speculation."

Last week central banks including the US Federal Reserve agreed to make available cheaper US dollar loans to battered banks in the euro zone. The ECB may provide further help to the region's banks on Thursday if it signals "extended" short-term loans will be made available to bolster liquidity.

Draghi last Thursday promised that the central bank was ready act more aggressively to contain Europe's debt crisis if political leaders agreed to more stringent budget control measures at this week's summit so there may be more from the central bank on Friday or next weekend.

It's going to be relatively quiet on the US economic front in the coming days. The latest jobs report, released on Friday, was unexpectedly positive but the data hasn't fundamentally changed the outlook for the world's largest economy given the dark clouds over Europe and China. This week investors will eye the ISM services report, weekly initial jobless claims and the trade balance.

(BusinessDesk)

BusinessDesk.co.nz

Comments from our readers

No comments yet