Investors Count Down to EU Summit
Wednesday's markets could be relatively quiet as investors count down to the European leaders' summit at the end of the week.
That is, of course, unless there are any signs the discussions towards a more comprehensive plan to stem the sovereign debt crisis go off track. Stocks finished mixed Monday, with the Dow up 52 at 12,150 and the S&P up 1 at 1,258. The Nasdaq, however, slid 6 to 2,649. Treasurys were quiet with the yield on the 10-year rising to 2.091 percent.
U.S. economic data is light Wednesday, with consumer credit, released at 3 p.m. EST. Treasury Secretary Timothy Geithner continues his European tour Wednesday, visiting the French finance minister and French President Nicolas Sarkozy in Paris, after meeting German officials Tuesday. He also meets Spanish Prime Minister-elect Mariano Rajoy Brey in Marseille.
Geithner said the IMFcould play a helpful role in the crisis but he knocked down a report that the Fed would loan money to the IMF.
The euro Tuesday was off slightly against the dollar, ending the day at 1.3401. Standard and Poor's, after putting 15 EU nations on credit watch Monday, said Tuesday it was putting Europe's EFSF bailout fund on credit watch.
"Yesterday, the threat of the S&P downgrade was a warning shot to them that they have to come up with some sort of viable solution," said Boris Schlossberg of GFT Forex.
European stock markets finished lower with the euro on the downgrade warning.
Jack Ablin, CIO of Harris Private Bank, said it's possible the U.S. market is trying to decouple from Europe. "I think economically we're pretty much insulated, and I think our financial system is much more insulated that investors believe," he said.
Ablin, like other analysts, said the market may be setting up for a move higher into the year end, if European leaders make progress toward a solution.
Janney Montgomery chief investment strategist Mark Luschini agrees. "Our likely scenario is that there will be something (form the EU summit) that will be enough to provide some relief from the most acute aspects of this sovereign debt crisis, at least pushing it into 2012," said Luschini. Then "the fundamentals will bear out in the U.S. equities market, in that stocks look cheap in an increasingly encouraging economic climate in the U.S."
The Financial Times helped give stocks a lift Tuesday afternoon, after it reported that there are now negotiations to create a bigger financial "bazooka" by creating a rescue system, that includes two separate European rescue funds and the help of the IMF. This plan could be presented alongside proposals to rewrite the EU treaty to create a tighter fiscal union with authority over budgets, according to the Financial Times.
The 440 billion euro EFSF , European Financial Stability Fund, would be run alongside a new 500 billion euro fund, the European Stability Mechanism, starting in mid 2012, according to the paper.
"My fear is they're going to resort to this ad hoc approach, which will have a temporary effect on prices but not provide any long term answers. They need to have euro bonds. What they want to do is maintain all their sovereignty. If you have a single currency, you must give up fiscal sovereignty ultimately," said Schlossberg. Germany has strongly opposed the idea of euro bonds, which many analysts believe would be a step toward resolving the crisis.
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