Market Outlook Hopeful on EU Moves

Growing acknowledgment of the severity of the financial situation by Eurozone policymakers has infused the global market with hope that a crisis may yet be averted. Bank recapitalization, …

Growing acknowledgment of the severity of the financial situation by Eurozone policymakers has infused the global market with hope that a crisis may yet be averted. Bank recapitalization, talk of a second round of quantitative easing in the United Kingdom and reorganization of the European Financial Stability Facility have jolted several indices; Japan’s Nikkei, the MSCI Asia Pacific index and the EuroStoxx 600 all posted gains on news of the EU shakeup, but the crisis is not over and the short-term boost may not last. For more on this continue reading the following article from The Street.

Market sentiment continues to improve, albeit modestly, as investors remain somewhat optimistic that European policy makers are making headway toward mitigating the crisis.

The EUR-USD traded at session highs, near 1.37, coinciding with European stocks reversing earlier losses and moving into positive territory. The EuroStoxx 600 is hanging on marginal gains, up 0.2%, with bank shares weighing on the index, down 0.5%. Asian stocks closed a touch higher, but trading was largely subdued overall.

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The MSCI Asia Pacific Index was up just 0.5%, while Japan’s Nikkei gained 0.15% by the Tokyo close. Tuesday’s rally was influenced by both quarter-end window dressing and hope that European policy makers finally understand both the severity and the urgency of the situation they are facing. Elsewhere, the Bank of England’s David Miles is the latest Monetary Policy Committee member to talk up the possibility of QE2 in the UK, which appears increasingly likely in October or November.

The eurozone, again, continues to occupy center stage. The noises out of Europe suggest that bank recapitalization and an enhanced European Financial Stability Facility are on the table, but the finer details are yet to be agreed.

This morning Finland’s parliament ratified the expanded powers of the EFSF agreed in July, but Finland’s demand for collateral in exchange for its share of any loans to the EFSF is unlikely to be fully addressed at this juncture.

In the emerging markets space the price action the past few days has reinforced many of the themes we have been discussing, especially given the outperformance of IDR and KRW in the region. In Asia, we think that the balance of risk starts to shift when USD-IDR approaches 8900 and USD-KRW approaches 1200. IDR and KRW will be supported by relatively more aggressive official intervention during periods risk-off and will likely benefit from stronger rebounds during periods of risk-on.

In the North American session, Mexico releases its months GDP proxy for the month of July, with the market consensus expecting a rise of 3.65%.

This article was republished with permission from The Street.

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