Window of opportunity
Eoin Treacy's view On July 21st European leaders announced plans to expand the role, size and powers
of the European Financial Stability Facility. Here is a link
to a helpful presentation from the EFSF. The financial markets took a few days
to digest the news. As realisation dawned that the agreement would have to pass
through each individual parliament and not until at least late September, those
wishing to express a bearish view were offered a relativity short window of
opportunity. Most stock markets fell abruptly in early August, gold accelerated
higher, Treasuries, Bunds and Gilts all rallied and the US Dollar steadied.
By August 8th most stock markets outside of Europe began to find at least short-term
support. (Also see Comment of the Day on August
The lack of fiscal union has long been highlighted as a major deficiency in European monetary union. It was not politically tenable a decade ago to introduce it. Now they have little choice. Voters in countries such as Germany, the Netherlands, Finland and Austria are understandably unset at the idea of higher taxes and lower government spending because of problems in other countries, particularly those who have previously been profligate spenders. Politicians are now pushing through the relevant EFSF legislation. Once created, it will be much easier to further increase its ability to issue debt. There is the world of difference between politics and policy. Everything points towards publicly denying plans to create something akin to a Eurozone finance ministry but privately doing exactly that.
Here is a table containing the schedule of when each Eurozone parliament debates the expanded EFSF measures. France, Spain, Italy, Belgium and Luxembourg have already passed the necessary legislation. Most countries, including Germany will pass it by the end of this month. The Netherlands, Cyprus, Estonia, Slovakia and Slovenia will probably pass it in October. What does this mean for markets?
The EFSF will start out with €440 billion but this number can be expected to increase as needed. That is a sizeable chunk of liquidity and more importantly the creation of the Facility will remove a degree of uncertainty. There is still room for additional problems within the Eurozone to arise. The compliance of various populations cannot simply be taken for granted. However, if we look to the price action, the majority of stock markets have at least steadied. A large number of those leveraged to the growth of the global consumer, cutting edge technology and healthcare remain above their respective 200-day MAs. These represent the leading sectors following what is potentially the nadir of this crisis. They should continue to lead if a recovery scenario begins to unfold.
A rally in banking sectors, particularly in Europe, stronger Asian currencies and weaker oil prices would all help to restore investor c