European Rescue Puts Focus on Earnings

by: Streetwise Blog

By Andrew Willis

The prospect of a financial bailout for Europe on Monday has strategists predicting a rally in equities, as cash comes off the sidelines.

Overseas markets are roaring higher after Europe’s central bankers agreed to a comprehensive package of loans that totals $960-billion. North American markets are expected to follow suit, as index futures are all up sharply on Monday.

As part of the rescue, the European Central Bank reversed course from last week and agreed to buy government and corporate debt, much as the American government did during the U.S. financial meltdown. The EU package is designed to bail out debt-heavy nations such Spain and Portugal, along with crisis-ridden Greece.

"Markets may have gotten the package they wanted and we believe equities will rebound,” said Scotia Capital strategist Vincent Delisle in a report early Monday. “Treasury yields should also move higher now that the safe haven trade is off.”

Europe’s problems in recent weeks overshadowed a recent run of stronger-than-expected earnings from North American companies, Mr. Delisle said.

Looking ahead, Mr. Delisle predicted that North American and Japanese markets will outperform this year, while Europe and emerging markets such as China and Brazil will underperform.

“Europe will lag the global recovery by a wide margin and euro assets should continue to underperform. But a EU-driven global recession appears far-fetched, especially with steady improvements in U.S. macro,” said Scotia Capital.

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