Say what you will about my demeanor, but when it comes to financial markets, I’m an optimist at heart. Therefore, my natural inclination is to look for the positives. And in the wake of the most recent Euro Summit, I find a lot to be happy about.
Regulatory Framework for Big Banks
As widely expected, European policymakers agreed upon a new regulatory framework for big banks. But, they have also agreed on some things that were NOT widely expected, namely a mechanism for directly recapitalizing the banks, bypassing the sovereign; and giving up on the seniority of European Stability Mechanism and European Financial Stability Facility lending for the banks, both necessary, market-friendly conditions to help bring the crisis to an end, although they’re not sufficient to solve the crisis on their own.
The Need to Support the Sovereign Bond Markets
In the cacophony of comments from all manner of official and self-appointed spokespeople, it seems they have at least agreed upon the need to support the sovereign bond markets. If it’s true, the outcome of such an agreement will quickly become self-evident in the Spanish and Italian markets.
French President François Hollande has Changed the Political Equation
Even if a support program doesn’t get implemented, it is becoming crystal clear that the election of Monsieur Hollande has changed the political landscape in Europe. The Euro Summit was the proof in the pudding that Germany’s iron grip on the political and economic agenda of Europe is fading: no seniority, direct lending to banks, talk of an economic growth initiative, and the formation of regional political blocks to counter Germany hegemony… it is a changed world!
Since there is a lot of negative news already priced into the market, a relief rally following the summit is not totally surprising. For this to continue, there needs to be follow-through on these discussions, and continuation of the rally may be equally dependent on a turn in the economic data in the U.S. and emerging markets. Unfortunately, I may have less to be optimistic about on that front. For the moment though, Euro optimists have a lot to celebrate.