European stocks are trading at multimonth highs as Germany's Constitutional Court approves the constitutionality of the Fiscal Union and the European Stability Mechanism (ESM). However, it did state that the German liabilities were limited to the 190 billion euros ($243 billion) already pledged and that the German Parliament would have to explicitly approve any additional funds. This is effectively a cap on German participation, underlying the fact that this is not a "blank check."
The ESM should be functional in about a month.
European banks are trading up about 3 percent. German stocks are at a 52-week high; France, Greece, Spain, Italy, Portugal markets are at multi-month highs. Italian 10-year debt yield is at a five-month low of 5.009 percent, if it drops below 5 percent it would be first time since April.
1) Banking, fiscal, and political union in Europe: EC President Jose Manuel Barroso wants it all. Long-term, the biggest news today may be the speech given by Barroso.
The headline news is that he unveiled a plan that moves toward a banking union. Under this proposed plan, the European Central Bank would supervise euro zone banks (a role now held by national governments), a fund would be established to close troubled banks, and a common deposit insurance would be established. All this would need to be approved by the European Union's member states.
Barroso is pushing for the ultimate goal: a political union. Barroso went heavy on the pan-European ideology in his speech, arguing that Europe needed to take the next steps toward fiscal union. He argued for a "decisive deal for Europe," saying, "We must leave no doubt about the integrity of the union or the irreversibility of the euro." He also argued for labor flexibility and simpler taxation.
We've heard this before, but Barroso added that, over time, this fiscal union would include "steps for genuine mutualization of debt."
His plan goes beyond that: "We need to take concrete steps now, with a political union as a horizon .... We cannot continue trying to solve European problems just with national solutions." Barroso said bluntly: "We have very often a real disconnect between political parties in the capitals and the European political parties here in Strasbourg."
The answer, he said, is to strengthen the European Parliament and making European parties the center of Europe, not national parties.
2) After the Federal Open Market Committee meeting tomorrow, and with much of the immediate European news out of the way, we are going to quickly turn our attention to the global economy, and it is not particularly pretty. Even in the U.S. ISI, in its morning note, started with "Green Shoots Fading?"
This discussion will pick up tomorrow, as many are expecting the Federal Reserve to reduce its economic forecast for 2012 and 2013.
3) Front running the Fed: Speaking of the Fed, many investors seem to be betting that, at the least, the Fed will extend its forward guidance to keep rates low into at least 2015 (from 2014). There has been big volume in junk bond funds (JNK and HYG), forcing them to another new high yesterday. These high-yielding funds would be beneficiaries of any continuation in the Fed's low interest rate policies.
—By CNBC’s Bob Pisani
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