Sunday, July 1, 2012

For the Eurozone and the Global Economy - is 19 the Lucky Number?

Last week, Eurozone leaders held their 19th summit in Brussels to work on the region’s numerous financial problems. Given that prior meetings ended with disappointing results, global investors were positively surprised that any progress was made at last week’s gathering.  The meeting resulted in announcements that:
  • rescue funding would be made available  to help Spain’s fragile banking system and to buy Italian sovereign bonds,
  • the European Central Bank would move forward with a plan to oversee Eurozone banks and
  • €120bn of funding will be made available to stimulate economic growth within the region.  
On Friday, global market responded positively.  The Euro rose 1.8 %, Spanish 10-year bonds dropped to 6.32%, Italian bonds dropped to 5.81%, the S&P 500 increased 2.5%, the European FTSE 100 increased 1.4%, the Italian stock market increased 6.5% and Spain’s stock market was up 5.6%.  Among commodities, gold increased 2.8%, copper increased 4.9% and oil was up 7.0% for Brent and 9.3% for WTI.

  • Expectations were very low for the summit, and Friday’s news does represent progress in a very protracted process - it has taken over 3 years and 19 summits for the Eurozone leaders to get to this point.  
  • Skepticism remains high about the ability for diverse Eurozone interest groups to deliver on Friday’s plans.  Given the almost glacial pace of progress, investors should recalibrate expectations for a quick fix, as there are many details to work out.  Government deficits remain high and debates continue on austerity driven budget cuts and growth driven spending programs.  The a significant challenge in resolving the Eurozone’s problems is that they are financial, political and cultural – how much control will Eurozone member countries hand over to a central authority such as the European Central Bank?  
  • For now, global investors can seek comfort that the Euro currency will not imminently collapse, but they are left wondering if the actions from summit number 19 are simply the result of a “shotgun wedding”.  
  • Note: Among the euphoria of Friday’s market moves, Nike Inc. was down 9.4% based on disappointing earnings driven partially by weakness in Europe and China, and Ford Motor Company was down 5% after announcing that “our operations outside of North America are under increasing pressure."  There may be light, but there are still clouds.

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