European stock market rises amid promising negotiations

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Greek Finance minister Evangelos Venizelos arrives for a press conference at his ministry in Athens on October 27, 2011, a day after European leaders at an emergency summit called on banks to raise their core capital ratios, a key measure of stability, to nine percent. The Greek debt mountain, which threatened to sink the country and the eurozone, is now manageable after a deal with creditor banks to cut it by 50 percent, Venizelos said. Photo - Louisa Gouliamaki/AFP/Getty Images

Eurozone leaders last weekagreed on a massive rescue package for Greece and other struggling financial institutions in the region. According to the agreement, private banks and insurers will accept 50 per cent losses on their Greek debt holdings. The deal also expected a re-capitalisation of struggling European banks and an increase in the European Financial Stability Facility (EFSF). The EFSF facility will be increased from 440 billion euros to about one trillion euros.

This deal is surely a positive development and is expected to end the ongoing uncertainty in the European region, at least in the short term. This positive development in the European region is expected to trigger a short term rally in the global markets. The huge package is expected to provide more time to the weaker European Union countries to implement austerity measures and get their countries back on track.

US ECONOMIC DATA

In the US, GDP grew by 2.5 per cent in the third quarter of the current year – the fastest so far this year. The GDP figures came much higher than market expectations and took the markets by surprise. The consumer spending in the US has been quite strong during the last quarter, which leads to the strong third quarter GDP number. This is a positive data point and will go a long way in calming fears of a double-dip recession. However, it’s a bit early for celebrations and one has to wait for more data points to confirm a strong underlying consumer sentiment in the US markets.

COMMODITIES UP

The momentum is coming back to the commodity markets slowly as well. This market had subdued activity since the last few weeks due to the uncertainty in the eurozone and fears of a double-dip recession in the US. The prices of international commodities went up last week. The price of crude oil and metals surged after the agreement in the EU.

The swings in the S&P 500 (SPX) may not be as dramatic, but the moves clearly mimic what the DAX in Germany is doing.

“The progress in Europe has been painfully slow but it seems like European leaders are coming to the conclusion that the rescue fund has to be increased in size and steps have to be taken to recapitalize the banks,” said Alan Skrainka, chief investment officer Cornerstone Wealth Management in St. Louis, US. “I think Europe is finally taking this more seriously.”

“There is a certain element of panic buying going on,” said Bruce McCain, chief investment strategist with Key Private Bank in Cleveland. “If Europe doesn’t blow up, investors may be positively surprised. Right now, it’s more a matter of avoiding huge disappointments.”

G20 BACKS EUROPE PLAN

“European leaders are still wrangling over how to get more firepower out of the bailout fund,” said Paul Christopher, chief International strategist Wells Fargo Advisors in St. Louis. “Some want to use it as an insurance fund. Some want to turn it into a bank. Germany and France are still going back and forth.”

Christopher pointed out that the market seems to be ignoring the fact that forcing European banks to take deeper discounts on their Greek debt holdings while also requiring them to be recapitalised are “mutually contradictory goals.” He added that it’s still not certain that Europe will be able to avoid a worst-case scenario of an abrupt Greek default.

The stock markets rallied sharply last week due to the positive triggers from all round the globe. The agreement in the European region to rescue Greece and their struggling financial institutions provided the much-needed relief to the markets. On the other hand, the better-than-expected economic data from the US macroeconomic front boosted the mood in the markets too.

The global markets are expected to witness an upward movement in the short term mainly due to the easing of the European uncertainty. However, it is important to remain cautious in the markets and track developments in the Western countries closely. A more detailed analysis of the European agreement is needed to understand various pros and cons and its impact on various sectors.

Investors are set to make profits in lucrative positions and exit from loss-making positions in the event of the markets rising sharply in the short term.

Sources: CNN Money, Economics Times

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