EmailThere isn't a lot to be said about the equity market this morning. It ended basically flat yesterday and it is indicated to open modestly lower today.
The lack of conviction/participation yesterday was reflected in fairly light trading volume that spoke to a wait-and-see mindset ahead of the ECB rate decision on Thursday and the ballyhooed EU Summit on Friday.
It is generally expected that the ECB will cut rates by 25 bps to 1.00% and extend term limits for its lending operations.
In terms of the EU Summit, it is generally expected to produce some form of good news that conveys a sense eurozone leaders will be committed to proactive solutions for tackling the debt crisis and restoring investor confidence.
Not everyone shares that hopeful attitude, yet based on the recent behavior of equity and bond markets in the eurozone, alongside the roaring gains registered in the U.S. equity market, it is clear that the prevailing expectation is that function is going to follow form on the other side of the EU Summit.
To be sure, a number of trail balloons are being floated to suggest what form a debt crisis solution will take. Yesterday, for instance, the wires were buzzing with reports that European leaders are considering two, separate rescue funds that would also involve pushing up the implementation date of the permanent EUR 500 bln European Stability Mechanism (ESM).
The question is, will the functionality be there after any grand solutions -- whatever they might be-- are agreed to?
The last grand solution from the EU Summit in late October, which produced a framework for a leveraged EFSF and a provision for a "voluntary" 50% haircut for private holders of Greek debt, didn't exactly produce much functional relief. On the contrary, things only got worse. That is why the world is waiting on the outcome of yet another "make or break" summit this week.
For now, some attention has been paid to Germany's success in auctioning off EUR 4.09 bln of 5-year bonds. There was a strong 2.1 bid-to-cover ratio versus 1.5 at the prior auction, although the average yield of 1.11% was also 11 bps higher than the average yield at the prior auction. In any event, the pickup in demand was viewed as a point of relief.
The latter has been a steadying influence for most eurozone bond markets; however, eurozone equity markets are currently on the defensive, unable to hold earlier gains.
The defensive posture of major European markets, which appear to be tracking the euro, has contributed to a reversal in the S&P futures, which were up as many as 12 points in overnight action, but are now down two points and are trading 0.4% below fair value.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
