Enjoy the Holiday Cheer

• Posted by Robert Sinn
• on June 29th, 2012

Markets were under heavy pressure yesterday afternoon and most veteran market participants felt that the market was on the verge of buckling under its own weight. However, around 2:30pm just when it looked like markets would accelerate to the downside, they didn’t, and in fact reversed aggressively higher into the close. The resilience in the face of hugely negative breadth across equities, and commodities that were being taken to the woodshed was impressive by itself. But it was the high volume vertical climb into the close which caught most napping that let me know risk was to the upside, at least in the near term.

What did the Europeans decide last night at 5am that is so significant you ask? Like most EU announcements the details are few and far between but what we do know is that the Germans caved and gave in to several Italian and Spanish demands. Moreover, there is now a much stronger idea that the eurozone is moving toward a single eurozone-wide banking supervisory authority which takes another important step toward tighter fiscal integration and a eurozone bank depositor insurance scheme.

Perhaps the most important dynamic in markets’ reaction to the EU Summit news was low expectations, when expectations are low the risk of surprise is to the upside and vice versa; therefore, markets are likely to cheer the latest eurozone plans for now and perhaps through the July 4th holiday in the US. However, there are still many details to be worked out and there are still many old problems that have yet to be resolved (Greece, existing sovereign debt, budget discipline & enforcement, etc.). Oh and don’t forget there is still that small issue of intra-European economic competitiveness and growth…….so enjoy the rally while it lasts but once markets return from their July 4th holidays and look for the meat on the eurozone turkey they might be sorely disappointed.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus