Markets to bounce? – thoughts on Merkel, Sarkozy and Papendreou

I write this not with trepidation. Trepidation because it goes counter to what I have been writing lately and trepidation because it is even different to what I thought when I went to bed last night. It is still not a fully formed view but I would pose the question to readers,

Could we have seen a paradigm shift in the Euro Crisis last night?

Not one that miraculously fixes the problems of Europe but one that ensures that come what may we muddle through the news cycles and poor economic data but one which perhaps will hold the Eurozone together.

Let me explain.

Earlier this week I wrote

…since the Treaty of Rome in 1957 ,which effectively established the EEC (European Economic Community) the forerunner of the EU, there has been a movement toward greater integration amongst first the core countries of Europe and more latterly the broader vision of a grand European Union which expanded east and south. The whole time this movement was supported by political will at a heads of state level which carried a slightly cynical at times individual national populations. There were hiccups along the way of course but generally European politicians have been able to take their populations with them.

This is not necessarily the case now…

But in fact I may have been wrong and that excites me. Last night there was a phone hook up between Chancellor Merkel of Germany, President Sarkozy of France and Greek Prime Minister Papandreou and the two big guys of Europe said that they were convinced that Greece’s future lies within the Eurozone.

I know these are just words at the moment but this decision to stand behind Greece by these two leaders and effectively then these two nations, is potentially a seminal moment in the crisis.

It would be easy to walk away from Greece, particularly for Chancellor Merkel given the politics in Germany as I wrote earlier this week, but in standing firm Merkel and Sarkozy continue the legacy of the leaders before them who build the EU. So while we are no doubt going to get the rolling news crisis that continuing perhaps there is not going to be a Greek default which is good, actually superb, news.

Perhaps cash, as I wrote last night, is not king after all, at least for the moment. This news will not cure the ills of the global economy as the retail sales data in the US showed last night and it is equally clear that European growth is slowing.

As I say, I write this with trepidation and a feeling of being one out but perhaps its time for markets to bounce a little and risk assets to perform. While AUD is above last nights low of 1.0180 I like it higher perhaps all the way back to 1.0440/50 and maybe even 1.06 where we can re-evaluate (it is still in a downtrend after all). Perhaps the S&P 500 may rally to 1250/60 and perhaps the ASX 200 might move up toward 4200/20.

Short term for certain but lets see how the market settles, if it does over the next few days and weeks. 

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. 

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

 
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  1. Australian Dollar Weekly Outlook | Lighthouse Securities - September 19, 2011

    […] apparition of European resolve might trade the Aussie to 1.0450. So much so that I actually wrote a piece to this effect (this game is never […]

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