Measures announced by the European leaders after the summit in Brussels proved to be boon for Bulls waiting for their turn to respond to the ongoing Bearish spell and they returned to hit back the market with vengeance.
European announcement gave boost to the crude oil prices that surged by nearly 9.5 pct, global stock market jumped by 1.4 pct to 6.4 pct, gold gained by over 3 pct and Euro enjoyed 2 pct bull run during the day.
It was German Chancellor Angela Merkel’s nod with u-turn of her policy that paved way to
reach some sort of understanding, probably realizing that she cannot continue to afford with her one-sided stance by always refusing to her European partners demand.
She finally succumbed to the Spanish and Italian demand for softer austerity policy and thus had to back out from her earlier demand for budget cuts to support growth ( Euro 120 billion growth pact proposed by French President Hollande ) and easing of lending rules to the European banks faced with capitalization problems. The deal is likely to help reduce the borrowing cost as well.
To obtain final approval she was quick to rush home and get the parliament’s approval on European bailout funds and after tough negotiations she had to compromise on some of the domestic tax matters that could weaken her politically. But she was able to get the required two-thirds majority votes for permanent Euro rescue fund, the European Stability Mechanism (ESM) and the fiscal pact so that she can avoid constitutional challenges.
This approval of Bundestag will allow direct pumping of funds into the struggling the European Banks, which means Spanish banks borrowing ESF funds will not increase country’s (Spain’s) debt. Importantly, the lending will only be possible after the ECB establishes European Banking Supervision Mechanism that could take time.
But who knows that there is another bombshell ticking in Euro-zone, so allow this move to happen and enjoy few more strides, then adopt a cautious approach and don’t be too impressed and complacent with the current ongoing European party. Market will soon realize that they are flying too high and are short of gas resulting sharp fall.
I would like to remind that banks that received LTRO funding are faced with hardship. LTRO 1 and then LTRO 2 a total of over Euro 1 trillion was not enough for the European market, what is the guarantee that ESF fund will be enough to resolve European issues.
Therefore, just keep a close watch on the European bond and Credit Default Swap (CDS) that will provide more clues about the future trend of European market.
There must be lot of political talk amongst the European leadership, as they must be proudly talking of reaching an understanding on growth and willing to spend Euro 120 billion. Do not forget that Spain and Italy will provide 30 pct of the ESF money. Which bank will take risk to provide credit lines to insolvent and overleveraged banks as not a single penny of LTRO money was provided to the corporations and who else will provide this money, I mean through which source ?
However, next week market will continue to focus developments in Europe and the Bullish rally is likely to extend with chances of occasional correction providing opportunity to make money on the bounce back.
Two major events of the week could ECB rate cut by 25 basis point on Thursday and US employment report.
Last Week - Monday June 25-29