Hooray For Europe!

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By Mike Conlon | July 22, 2011

Yesterday’s market reaction to the news out of the EU could not have been a more perfect scenario for those searching for a ray of hope that the global economy might actually be able to move forward. News out of Brussels was that indeed a solution to the Euro debt crisis had been agreed upon, going a lot further than most had thought possible.

While the markets are still trying to judge the merits of the resolution, the EU took some bold steps to try to stem the crisis. Some of the highlights: Greece gets a larger bailoutâ€"but needs to enact major austerity to receive it; Greece gets AAA-rated terms for borrowing from the ECB and EFSF, as does Portugal and Ireland if needed; the ECB will buy bonds and essentially be a “bidder of last resort”, all but daring speculators to try to drive yields higher on Spain, Italy, or others (think ‘don’t fight the Fed’). These are extraordinary measures that will give the debt-burdened countries a chance at redemption. However, the question remains as to whether or not the austerity required is too draconian, and the likelihood that it can be accomplished. One other thing to note however is that the EFSF was not expanded so the size of the emergency facility remains at 440 billion euros, which hopefully is enough to manage future liquidity issues.

While this serves the markets purposes for now, it appears likely that the EU economy is going to shrink in size as austerity is enacted throughout the region. One early sign is that German IFO confidence figures have come in lower than expected, though Euro zone industrial orders picked up for the month.

The rally that took place yesterday has followed through to this morning, with stocks in Asia and Europe up overnight, as are commodities. Next up is the US debt ceiling debate, and the politics surrounding it has gotten so nasty that it’s almost become comical. A deal will definitely get done and the only question is at whose expense.

In the forex market:

Aussie (AUD): The Aussie is mostly higher, easily clearing the resistance identified yesterday at 1.08 vs. USD. Export and import prices have risen, which could give rise to inflation down under.

Kiwi (NZD): The Kiwi is has rocketed higher to 86.75, just south of my target of .87 from earlier this weak. Inflation expectations are rising, which means that so are interest rate hike expectations as well.

Loonie (CAD): The only other fundamental data out his morning has come from Canada, which reported lower than expected CPI data that has sent the Loonie lower, despite oil trading up to $100. Core CPI came in at 1.3% vs. an expectation of 1.9%, and the headline figure came in at 3.1% vs. an expected 3.6%. This may buy the BOC time to allow the economy to continue with lower rates as prices seemingly are under control. Better than expected retail sales figures showed a gain of .5% vs. an expected .3%, which shows economic improvement. (Click chart to enlarge)

Euro (EUR): The Euro has pulled back some to under 1.44 vs. USD as markets are set to open slightly lower here in the US. While the market seemed pleased with the initial resolution form yesterday, as more is learned about the deal, the less enamored the markets may become. (Click chart to enlarge)

Pound (GBP): The Pound is also pulling back after yesterday’s rally and with no news on the docket may be a victim of having traveled too far, too fast.

Swissie (CHF): The SNB has been thankful of late that risk is abating in the global economy as the franc becomes less desirable when safe-havens are out of favor.

Dollar (USD): I’ve read some analyses that claim that yesterday’s massive moves were more a function of Dollar weakness than Euro strength. The markets are looking for any indication that the global economy is stabilizing, as the appetite for risk is increasing as cheap money floods the globe. We need a compromise on the debt ceiling debate to really instill confidence.

Yen (JPY): The Yen is picking up some strength as risk appetites are turning to risk aversion as the morning moves forward. Nevertheless it was lower yesterday as carry trades were re-established.

As I said yesterday, “buy the rumor, sell the news”. While the Euro debt crisis resolution may be better news than expected, the devil is always in the details. As the markets start the comprehend all that needs to be done, opinions over the deal may change.

While we are seeing a pull-back in the early action here in the US, this could be more of a function of jittery markets still being fearful heading into the weekend. The debt ceiling debate rages on here in the US and should it seem less likely that a deal can be reached, then the markets may react quickly.

So now it is up to the US, and hopefully we can cast the politics aside for the better of all and not just a specific political base.

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