EmailIt is going to be a strong start to the week for the U.S. equity market. The S&P futures are up 18 points and are trading 1.5% above fair value.
Most reports attribute the bullish disposition to an expectation that this week will produce interest rate cuts from some leading central banks, a compromise in Congress on extending the payroll tax cut, and an agreement among EU leaders at their December 8-9 summit to forge a closer and more accountable fiscal union.
All things good for the equity market -- if they can happen.
With last week's coordinated action among central banks to boost dollar funding, there has been a move back into risk assets based in part on the belief that the greater risk of a eurozone debt implosion will not be allowed to happen by policymakers. That confident outlook has manifested itself in the eurozone bond markets, and particularly in Italy and Spain where yields on their respective 10-year notes have fallen by more than 100 basis points since last week.
The yield on the Italian 10-year note is down 41 bps today alone to 6.13% following a proposal of new austerity measures from Prime Minister Mario Monti that has included new taxes and an increase in the retirement age for drawing a pension.
These measures have been seen as steps in the right direction by bond holders and have set a hopeful reform tone ahead of the EU Summit.
German Chancellor Merkel and French President Sarkozy are meeting today to try and hash out their own differences regarding the path to closer fiscal union so that they can spearhead the idea of a treaty change on Friday for other EU leaders. There is some budding intrigue around the meeting, as reports indicate British leader David Cameron is not going to sit idly by and let Germany and France dictate changes to the EU treaty.
For the time being, though, it is the machinations of eurozone leaders that seem to be dictating market direction since they are the ones in the middle of the crisis.
Given what is at stake at the EU Summit, this week is being billed as a "make or break" week. We have lost count of the number of "make or break" weeks we have had this year, but so far eurozone leaders, with a little extra prodding from the capital markets along the way, have managed to keep putting Humpty Dumpty back together.
That realization is underpinning sentiment at the moment and is helping to keep bearish forces at bay. Furthermore, the prospect of a year-end rally tied to policy solutions has stoked the fear of missing out by sidelined investors that has driven a buy-the-dip mentality.
This should be another interesting week.
The prevailing expectation is that political leaders will not disappoint. That has proven to be a dangerous expectation in the past, so nothing can be taken for granted. Right now, though, at this moment on this particular day, it can be said the equity market is expecting good things to happen.
--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.
