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Market Round Up: December 5 - 9, 2011

Market Round Up: December 5 - 9, 2011

Santa Claus rally or Santa Claus crash?

General Comments: European Leaders made substantial progress at last week’s meeting, hammering out a treaty to protect the Eurozone and address the debt crisis.  Yet, some remain quite pessimistic. The economist magazine, for instance, stated that the treaty has done “little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds.”[1]

Basically, “Chancellor Angela Merkel of Germany persuaded every current member of the union except Britain to endorse a new agreement calling for tighter regional oversight of government spending… The new disciplinary rules may help ensure that there will not be another euro crisis, but they may not be sufficient to fix the current crisis” as Germany will not allow the ECB to act as a lender of last resort for Eurozone countries.[2]

North American Markets: Markets increased Monday, December 5th, with investor hopes about the December 9th meeting. This upswing is especially noteworthy in light of news from the S&P that top European countries (including Germany and France) may be downgraded within the next quarter.  The S&P said that the “placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole." This is a reflection of contagion fears for European economies. Market behaviour was mixed last week, as investors reacted to news about the upcoming Eurozone meeting, and US unemployment reports. Markets rallied on Friday and ended up, as Eurozone leaders “hammered out a basic agreement to form a closer fiscal unit among the 17 euro zone nations, easing some concerns about the on going sovereign-debt crisis.”[3] Bond yields did not retreat as strongly as markets rose, but some pull back was evident. This, together with the broad nature of Friday’s rally suggests increasing investor enthusiasm.

Global Markets: British Prime Minister David Cameron refused to sign the new treaty, as the other EU members (led by France and Germany) would not grant him the safeguards he sought (including giving Britain powers to block unwelcome regulation of the City of London). While many Brits applaud Cameron’s decision, this is not true of everyone. Lord Heseltine, for instance, has warned that attempting to protect Britain's financial services industry by cutting Britain off from Europe will fail.[4] Other EU leaders also seem upset with Cameron’s choices. One diplomat said that “nobody understood what Cameron wanted – Nobody… We were talking about big things – saving the Euro – and he was asking for peanuts. It was not the time or place.” Mr Sarkozy even brushed past Cameron, refusing to shake his hand as the meeting ended Friday. The problem with England’s refusal to sign the treaty is that the other 26 nations now have to “jerry rig an intergovernmental system without the automatic right to use the EU’s institutions, leaving it vulnerable to legal challenge. Financial markets have reason to doubt the new fiscal pact’s credibility.”[5] 

[1] little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds