The European Central Bank cut Interest rates the second time in two months as expected by a quarter point to 1% which initially gave stock futures a rise on Thursday, but that was reversed when they announced the ECB’s bond buying power will be limited and stress tests showed many banks need to raise more capital. This did not set up great expectations for Fridays announcements when the summit concludes.
So put Thursdays news into the mix with the fact that the market indexes were in a resistance area and the reactive outcome was down 2% for both the NASDAQ and S&P 500.
The drama has continued to come out of Europe. This week most of it surrounded the EU Summit. But what else could we expect after all the previous “make or break” meetings and subsequent disappointments. It was generally thought the summit outcome might be more grinch than Santa.
The market applauded late yesterday on word that an agreement had been reached on establishing a closer fiscal union and issuing a banking license to the ESM. Then that excitement dissapated as the market soon reacted to a subsequent headline that Germany did not support the proposal.
Fridays chance of good news was dampened initially, as the European Council published a statement detailing the outcomes of the summit.
They reported that 23 EU members have signed on to the new agreement. One notable holdout is the U.K., which withheld its support over a financial transaction tax proposal and the notion of losing any fiscal sovereignty.
Prime Minister John Major warned that Britain would resist any move toward European federalism, and anything that Britons would see as a possible way to usurp their sovereignty.
The remaining members, meanwhile, were in agreement that automatic sanctions should be enforced in the event a member state has a budget deficit that exceeds 3% of GDP; that a new fiscal rule of balanced budgets should be introduced in national legal systems at constitutional or equivalent level; that the ESM should enter into force by July 2012; that the EUR 500 bln limit for the ESM will be reviewed in March 2012; that euro area and other member states will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 bln in the form of bilateral loans; and that the involvement of the private sector will strictly adhere to the well established IMF principles and practices.
This is all going in the right direction, but time keeps moving and getting so many sovereign nations to agree to be disciplined by others is a tough sell. Tiny Denmark, for example, was holding up the show for a while as the fiercely independent Danes spent Thursday trying to negotiate a special deal that would exempt them from some rules governing everyone else.
So an agreement by most European Union members to crack down on overspending will help ensure the current debt crisis isn’t repeated, and might help heavily indebted governments to slowly regain market confidence.
But the agreement does little to immediately lower the high borrowing costs threatening countries such as Italy and Spain. And what financial markets really want to know, says Stephen Lewis of Monument Securities in London, is “how eurozone governments and banks will finance themselves over the next three months.”
Countries will reduce their deficits to try and convince markets they can pay back their loans. The European Central Bank will help put downward pressure on government borrowing costs by making limited purchases of their bonds. But without a promise of more aggressive action by the ECB to take the threat of government defaults off the table, bond markets will remain panicky.
ECB President Mario Draghi praised the agreement made Friday in Brussels. But he appears to have rejected for now calls for the bank to make large scale purchases of European bonds.
As these further detials came out global markets started to rally. A good measuring stick for risk, bond yields in Europe eased. Itallian bonds were pricing in 6.55% at one point, and the VIX, a volaitily stock market indicator dropped. US markets appear to be headed for a 1.5% or better gain barring any last minute selling.
So while the debt problem is Europe does not have a fix, again some more time has been apparently bought. Stay tuned.
Redemptions from US domestic equity funds totaled $6.67 billion last week. This was the largest amount of weekly withdrawals since August 2011, according to the Investment Company Institute. Many investors, both individual and institutional, are frustrated by the market’s headline driven volatility, and some may be just simply scared.
Jobless claims also dropped 23,000 to 381,000 as reported by the BLS near the weeks end. Analysts were expecting 395,000 so this was a pleasant surprise to analysts, but European headlines again grabbed the most reaction.
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