Wednesday, 21 December 2011

Wednesday, 14 December 2011

The Outcome of the European Summit

The reports as follows:

Last week European leaders gathered in Brussels to discuss and implement strategies to strengthen the euro zone. Though a historic agreement was announced to draft a new treaty for deeper integration, this euro summit proved to be disappointing for those that were looking for a grand and comprehensive solution that would draw a line under the euro zone debt crisis. Here are the three main points that came out of Friday's agreement:

1. The European Union agreed to provide up to 200 billion euros ($267 billion) in loans to the International Monetary Fund to reinforce the global lender as it helps to tackle fallout from the European sovereign debt crisis.
2. It was decided to accelerate the start of a planned permanent 500 billion euro ($667 billion) rescue fund, called the European Stability Mechanism.
3. Balance budget rules were introduced that puts in place automatic sanctions if a member country's deficit exceeds 3% of GDP unless a qualified majority of euro-area members is opposed.

Though these 3 points are steps in the right direction, they are far from the big 'Bazooka' plan investors were hoping for. This was evident when credit ratings agency, Moody's warned on Monday that it will review all EU credit ratings. This comes after last week's warning out of Standard Poor's of the same review.

This European agreement also did little to soothe the bond markets. Ten-year Italian yields rose as far as 6.8%, prompting the European Central Bank to intervene in the secondary market, and German Bunds rose more than 100 ticks on Monday.

Though the European summit disappointed, it doesn't necessarily mean we will have a major sell-off during the remaining few weeks of 2011. Analysts at French bank Societe General said, “The outcome of the EU summit may be good enough to keep the holiday season from being spoiled by nasty market disruptions. But we fear that it is not the bazooka that can carry us to the wall of Q1 supply with much confidence.”

However, the lack of 'firepower' out of the European summit means that the sovereign debt crisis will continue to plague global markets in 2012. That’s unfortunate for traders and investors as stock markets have been experiencing and will continue to experience higher volatility and low volume.