Market’s Expectations for EU Summit Are Low

As markets get ready to leave the second quarter behind, Europe will continue to dominate the news but expectations for any progress there this week are low.

E.U. Flags
Photo: Ken Sciciuna | Getty Images
E.U. Flags

The EU leaders summit Thursday and Friday has been dangled before markets as though it might be a productive event. Yet analysts see little coming of it, even though there are hopes for the framework for a banking union. The summit is expected to result in a stimulus package of some 130 billion euros in infrastructure bonds, regional aid funds and European Investment Bank loans.

Comment s from Europe’s leaders ahead of the summit have been sparking market reaction this week. The latest zinger was from German Chancellor Angela Merkel, who in reiterating to members of her coalition that she does not support a common euro bond, was quoted as saying Europe would not have shared total debt liability “as long as I live.” France, Italy and Spain favor the common bond.

“The Merkel rejection and finality on euro bonds undermined the euro,” said David Gilmore of Foreign Exchange Analytics. He said, however, it rallied back later Tuesday on news reports that euro zone governments are discussing provisions to keep private creditors of euro zone debt from becoming subordinated to the ESM bailout mechanism.

“I think the expectations right now of the euro summit producing a set of announcements that can restore confidence in the euro zone, the periphery and help risk rally is quite low. And I think euro zone officials deliberately play down any speculation of significant news out of their summit,” Gilmore said. “We’re prepared for a pretty blasé nineteenth EU summit since the crisis began. And we’ll be looking forward to the twentieth.”

Stocks Tuesday finished higher, with the Dow up 32 at 12,534 and the S&P 500 up 6 at 1319. The Dow is down about 5 percent for the second quarter, but it is still up 2.6 percent for the year, while the S&P is down 6.3 percent for the quarter and up 5 percent for the year. The Nasdaq is up 9.6 percent for the year but down 7.7 percent for the quarter.

Nymex crude was slightly higher in late trading at $79.55, up 0.19, after American Petroleum Institute data showed stockpiles rose by 507,000 barrels. Analysts expected a 500,000 barrel decline. Grains again attracted interest, as weather forecasts for the Midwest continued to show heat and no rain. Corn was up 5 percent.

There a few economic reports Wednesday, including durable goods at 8:30 a.m. ET and pending home sales at 10 a.m. The U.S. Treasury auctions $35 billion 5-year notes at 1 p.m. There are also a few earnings reports – from General Mills , Monsanto , McCormick and Paychex .

Harris Private Bank CIO Jack Ablin said the Supreme Court decision on health care is also hanging over the market. The decision could support the legislation, throw out parts of it or throw out all of it.

Ablin said the broader market could see a “Republican rally” if it is clearly overturned. The Supreme Court is expected to announce its ruling Thursday on the Affordable Car Act, which has been a major cornerstone of the Obama presidency.

“I’m not obviously a health care investor but looking at the tea leaves suggests to me nobody has a clue because there’s such a divergence even within the subsectors. Some device makers are up big, some are down big,” he said. He expects the initial reaction, should the legislation be overturned, to be positive but then just temporarily because it will also bring more uncertainty with it.

As the third quarter approaches, Ablin said he’s still “squeamishly optimistic” about stocks. “Going into the earnings season, I haven’t heard too many pessimistic outlooks,” he said.

Follow Patti Domm on Twitter: @pattidomm
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