Time for European Leaders to Act
Analysts see little chance investors will get what's on their wish list from the EU this week, but European leaders will probably muddle through by providing enough of a framework towards a solution to their sovereign crisis to at least temporarily appease markets.
Thursday is an action-filled day in the euro zone, starting with the European Central Bank's 7:45 a.m. EST rate decision, which is followed by a press briefing. European leaders also start their two-day summit with a meeting and dinner, and a possible press briefing. Separately, German Chancellor Angela Merkel and French President Nicolas Sarkozy meet with ECB President Mario Draghi and several other officials Thursday afternoon.
More meetings and another possible briefing follow on Friday. Treasury Secretary Timothy Geithner visits Milan and will meet with Italy's new leader, Mario Monti before heading back to Washington.
"I'm about as skeptical as they come, but I do think they will get some kind of can kick," said David Gilmore of FX Analytics. "Is it a week's worth of tranquility? Is it a month's worth? A quarter's worth? All to be determined. I think the officials get the message from the markets that something has to be done, something very significant. It will probably fall somewhat south of that. But there will be something that will give us another punt of the can."
Merkel and Sarkozy released the details of a plan for euro zone nations to forge a tighter fiscal union, with a central European authority with economic oversight. They also urged treaty changes to ensure fiscal discipline, which includes sanctions for countries with excess debt or deficits.
Wednesday's trading was again dominated by speculation and news around European activities.
Unnamed French and German officials popped up in wire reports throughout the day, dashing expectations for a full blown deal. The French official suggested there may be an agreement by the 17 nations that use the euro instead of the extended 27 members of the European Union, and a German senior official warned Berlin was becoming increasingly pessimistic about the chances of striking a deal during the summit.
"This could be a game to keep expectations low," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Chandler said he expects the European officials to come up with some sort of plan but not a fully detailed bailout the market is hoping for. He notes that traders continue to short the euro and net short positions continued to increase during November. "As of mid-November, they were short 54,000 contracts. Now they're short 104,000."
Near the end of trading Wednesday, the Nikkei news service reported that the G20 was ready to load up the IMFwith $600 billion for a European bailout, but the IMF denied the reportshortly before the closing bell and the IMF-driven rally lost steam. The Dow was up 46 points at 12,060, and the S&P 500 finished up 2 points to 1,261. The euro was at 1.3411 in late day trading.
"I don't think we should believe anything until it's been finalized," said Gilmore. "There's been all sorts of reports that have been thrown out and subsequently denied."
Markets are watching for any news on how bailout funds would be structured and what role the IMF might play.
The ECB is expected to announce a rate cut of 0.25 percent rate cut, and possibly even 0.50 percent, as well as other measures to expand liquidity for the European banking sector. The ECB is expected to broaden the types of collateral it will accept, and also extend a one year program to three years, which allows banks to borrow what they need at low rates, Gilmore said.
Draghi last week made it clear that a more formal fiscal integration between European nations would be necessary before the ECB would take a bigger role toward solving the crisis, so his words will be watched closely.
What Else to Watch
There is also a Bank of England rates meeting Thursday morning, with a statement expected at 7 a.m. EST.
Besides the flood of news expected from Europe Thursday, there is important weekly jobless claims data at 8:30 a.m. EST and wholesale trade data at 10 a.m. Claims rose back above 400,000 last week, and it will be a negative sign if that trend continues.
New York Fed President William Dudley speaks at 8:30 a.m. EST.
Brown-Forman , Costco , and Smithfield Foods report earnings before the opening bell.
Miffed About MF
Hearings on MF Global could get more interesting Thursday, as former CEO, former Sen.. and former N.J. governor Jon Corzine is expected to testify. Corzine has been subpoenaed by several committees and it's not clear whether he will rely on the Fifth Amendment, after making an initial statement before the House Agriculture committee.
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