×

Growing Pessimism Over EU Summit Drives Market

Markets across Europe fell Thursday morning as negative sentiment about the European Union summit on Sunday spread.

European Central Bank
Travelpix Ltd | Photographer's Choice | Getty Images
European Central Bank

"A single, almost unknowable outcome is driving global equity markets," Guy Monson, Managing Partner & CIO, Sarasin & Partners, told CNBC Thursday.

A leaked document outlining guidelines for the European Financial Stability Facility(EFSF) indicated that the fund will be able to buy bonds in the secondary markets, sending the euro higher and helping stocks pare some of their losses.

As French President Nicolas Sarkozy and German Chancellor Angela Merkel discussed their divisions ahead of the key weekend meeting, strategists warned that the longed-for solution was unlikely.

"At this point, the probability that we get a successful outcome out of this weekend is not particularly high," Graham Secker, Chief European Equity Strategist, Morgan Stanley, told CNBC Tuesday.

"There's a lot of ground to be covered in the next two days to get to the point where the market will be satisfied with the outcome."

Secker advises investors against buying European stocks at the moment.

"If we can put the European business in a box, then the value for European equities could become materially more positive," he said. "There are still some hurdles to get through to reduce the risks in the long term."

Monson argued that the long-term outlook for stocks was promising. He said that third-quarter earnings season has so far been "quite encouraging," and pointed out that some cyclical stocks such as United Technologies have reported promising results this week.

"Everybody is looking to see if they can place a line somewhere, so that we can refocus on an astonishing underlying cash flow story," he said.

One of the factors causing market volatility is the use of algorithmic or "black-box" trading, where computer algorithms can enter orders without human intervention, based on mathematical formulae, according to Monson. He believes that the subsequent market swings are putting off "human" traders re-entering the stock market.

"There's increasing academic evidence which has been building up since the 'flash crash' in May that computer-generated orders do seem to follow each other, and when the market starts falling they seem to continue on the same trade," he said

"Some modeling seems to show humans coming in to buy companies, whereas on sharp moves, mathematical trades tend to pick up. That has resulted in the absence of normal marginal buyers."