Though European stocks are up this week, and the European Central Bank's three-year loan program was deemed a success (it eased funding difficulties for banks), the euro is little changed, hovering around $1.30. Spreads on southern European bonds vs. German bunds are generally wider, and Italian 10-year bonds remain near 7 percent.
This is a serious problem, as Italy has a series of bond auctions before the year is out.
A few things to watch for in the coming weeks:
1. The Greek negotiations with bondholders is reaching a critical stage. There are reports surfacing that the Greek government is proposing haircuts of up to 70 percent, not the 50 percent agreed. Mind you, this is only private investors who would take the haircut; the ECB, International Monetary Fund, and other government agencies will not.
2. Spain will likely announce new austerity measures in the next several weeks.
3. The threat of the Standard & Poor's downgrade of European sovereigns continues to dominate trading talk; most traders believe at least a one-notch downgrade of France is coming. Reuters noted a decision was coming in January.
4. More downgrades of European banks by rating agencies. We will get more information early in the new year about new capital requirements for European banks. The issue: Where are banks going to get the capital from? Their balance sheets have billions of depreciating sovereign debt on them.
Elsewhere:
European stocks advanced Friday against the backdrop of comforting U.S. economic data this week and a key confidence vote in Italy. The Stoxx Europe 600 Index rose 0.9 percent and is likely to close the week on a positive note. Paris’s CAC-40 gained 0.8 percent and is up 4.3 percent week-to-date. Spain’s IBEX 35 rose 0.9 percent — it is up 4.1 percent week-to-date. Italy’s FTSE MIB posted a 0.4 percent gain and is up 3.5 percent week-to-date. Frankfurt’s DAX inched higher, up 0.1 percent, and is up 2.7 percent week-to-date.
Asian shares rose in holiday trading, but was a mixed bag for the week. China’s Shanghai Composite closed down 0.9 percent for the week on the back of a rough previous week when the index closed at a two-year low on Dec. 15; it is now down for the seventh straight week. Japan’s Nikkei 225 ended the week down 0.1 percent. Hong Kong’s Hang Seng closed on a positive note, ending up 1.9 percent for the week.
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