This week saw all eyes not on the US but on the European Debt Crisis. Reports from Germany, by Chancellor Merkal and the German Central Bank say the 16 Nation Euro Currency will survive this debt crisis. German Chancellor Angela Merkel vowed Thursday, and a senior central banker said the European Union would be willing to increase its euro750 billion ($1 trillion) bailout fund if necessary.
Merkel and French President Nicolas Sarkozy also called for a swift conclusion of negotiations for an Irish bailout.
Axel Weber, the head of Germany’s central bank and a leading rate-setter at the European Central Bank, said Thursday that European nations would be willing to increase the emergency fund by as much as EURO 100 Billion ($133 billion) to cover fully the total public debt load of Greece, Ireland, Portugal and Spain.
The Week Ahead
In the week ahead, this underlying tendency toward risk aversion will find added fuel in a toxic mix of geopolitical and sovereign risk as North Korea continues to threaten open war with its southern neighbor while the Euro Zone struggles to reassure jittery investors about its ability to deal with festering debt problems on its periphery. Portugal managed to pass its austerity laden budget. However, bad news continued to flow out of Ireland where the ruling “Fianna Fail” party lost a key election in Donegal South-West, narrowing its majority in the lower house of parliament (the Dail) from three to two seats and threatening the passage of its budget on December 7.
All this plus the specter of a slower Chinese economy with reserve ratios set to rise 50 basis points as of Monday may prove hard to swallow. This move hints that the path of least resistance points lower for the spectrum of risky assets.
Soft readings on key US economic data, the bellwether for the state of the global recovery at large promised to bolster the likelihood of continued risk aversion. The ISM gauge of manufacturing activity is expected to show growth in the sector slowed again in November while the all-important Nonfarm Payrolls report reveals the labor market ended a three-month winning streak as the private sector added fewer jobs in November as it did in the previous month.