So the Euro lives to fight another day and though we are no closer to hearing a solution to the debt crisis, a relief rally is taking place this morning as there is thanks that the EU didn’t implode. Last week’s massive selling has paused for now and EU leaders have bought some time. This weekend’s IMF meeting produced very little except the notion that the IMF may need additional funding. Not good.
So what can the EU do to survive? Well there are many actions being bandied about that have different consequences. As I mentioned last week, the majority of these actions would be seemingly Euro-negative in the short-term, but positive for the survival of the shared currency. Though one never knows how the market will react.
Calls for the expansion of the EFSF bailout fund by leveraging the ECB balance sheet was brought up by US Treasury Secretary Geithner, who was met with a cool reception last week. S&P suggests that this could negatively affect European credit ratings.
Chancellor Merkel has called for a “firewall” to be built around Greece to prevent contagion from spreading to the other countries with sovereign debt issues which suggests that perhaps a future Greek default may not be out of the question. This however would instill a confidence crisis in the Euro and I think it would only be a matter of time before others chose that path as well.
The ECB could also lower interest rates at the next meeting, though the impact of such a move would be very minor in the grand scheme of things. They are said to be considering some covered bond purchases which would inject liquidity into the market and help ease monetary conditions.
Regardless of which course of action if any are pursued, there is a G-20 meeting scheduled in 6 weeks which is bound to put enormous pressure on EU leaders if a solution is not reached beforehand.
Despite all of the negativity surrounding the Euro zone and its impact on global markets, German confidence figures came in better than expected and markets are trading higher this morning as hope for a solution has improved.
In other news, New Zealand’s trade balance figures came in worse than expected, posting a deficit nearly twice than the expectation. This caused some early selling though the Kiwi has reversed as risk sentiment has improved throughout the morning.
Other than US new home sales figures due out later this morning, the docket is fairly devoid of news. This week is somewhat random in the news that is expected and all of the pieces could add up to a much bigger declining economic picture. With the focus on the Euro zone debt crisis still playing on center-stage, it will be the unexpected news that will move markets more forcefully than that which we are expecting.
Gold has been seeing some massive selling of late, as the market is moving to cash to raise liquidity ahead of any potential crisis. While the European banks have seen gains this morning, selling in this sector may resume at any time.
Oil has also pulled back as the global economy is seen as slowing, though it too has rebounded today. US equity markets are set to open higher and if they can hold on to the early gains, then we may see a bottoming process which would provide some support for risk assets.
