Will The EU Summit Results Match Expectations?

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 |  Includes: FXE, UDN, UUP
by: Ralph Shell

Anticipating positive results from another EU Summit, the euro (EURUSD), (NYSEARCA:FXE), (NYSEARCA:UUP), (NYSEARCA:UDN) has moved higher this week, breaking to the top side of the pennant formation on the chart. Earlier, Spain got a boost when the Germans seemed to moderate bailout terms. A line of credit for the Spaniards, rather than an embarrassing, full-blown bailout, might be approved. This, combined with the failure of Moody's to lower the Spanish bond rating, has also helped the euro, and has taken the yield on Spanish 10 year bonds down to 5.54%.

The Greek bailout is at a critical stage. In Athens, the Troika has been frantically trying to determine audit developments. Have the Greeks complied with the austerity plans so they get their next bailout tranche? The European markets have responded positively to comments from Finance Minister Wolfgang Schauble, who said he did not think Greece would default on its debts. In Singapore, he said: "I think it will not happen that there will be a state bankrupt in Greece. Greece has to take a lot of very serious reforms and this will harm. Everyone is trusting that the Greek government is doing what is necessary."

Perhaps German Finance Minister Schauble has softened his attitude after seeing a new report by Prognos, and commissioned by Bertelsmann Stiftung. They claim:

A new study by a German think tank warns that a euro exit by Greece, Spain, Portugal and Italy would cut global GDP by 17 trillion euros and plunge the world into recession, with France suffering the biggest loss. A Greek exit alone would be manageable, but must be avoided to forestall a domino effect, it says.

Should the dominoes move through Portugal to Spain, the losses would then climb into the trillions. The biggest hit would be taken by France, but there are whispers from other sources the large German bank is heavily exposed and under capitalized.

There will be other items on the agenda at the Eu Summit. Among them is the exploration of a "mechanism for fiscal solidarity" going forward in the out years -- 2014 through 2020. Intended in such a plan is EU approval of budgets, and penalties for the countries that fail.

Another German proposal, which they want in return for the cost of the current bailouts is an EU "currency commissioner." This non-elected commissioner would have power to alter or deny national budgets and enforce fiscal discipline.

As Evans-Pritchard said in The Telegraph today:

The new demands risk another stormy summit in Brussels on Thursday, pitting Germany against the Latin bloc. The last summit in June ended with an acrimonious deal in the small hours on a banking union that began to unravel within days.

In my opinion, the markets have discounted a lot of good news. Granted, the latest COT report did show the big specs were adding to their shorts. Perhaps some of these positions are coming off ahead of the meeting. In the past, however, the euro has run up in front of these major meetings, and then sold off after they are over. This time it may be different, but if unruly acrimony rules the day, buyers of these markets had best beware.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.