Markets wary of euro future

GLOBAL markets were given a shot of confidence this week as Europe took a big step towards solving its financial problems, but business leaders and investors caution the region is not in the the clear yet.

By InvestSMART · 29 Oct 2011

By InvestSMART ·
29 Oct 2011

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The Australian market soared on Thursday, and markets from London to New York did likewise as they opened for business. However, the enthusiasm petered out in Australian trading yesterday, with stocks closing only marginally higher.

That was also the pattern across European markets last night.

"Obviously the markets have been very focused on Europe in recent times and certainly the way they've responded in the last 24 hours gives you a feeling they're satisfied with what they've seen come out of Europe to date," Macquarie Group chief executive Nicholas Moore said yesterday.

"Given the market was looking for [this solution], it has responded well towards it and we can be hopeful. But of course we're unsure in knowing where we're going to end up."

Despite yesterday's flat performance, the past week has been the best for the ASX in more than two years.

The 5.1 per cent weekly gain is the biggest since July 2009, when the market was climbing back from the depths of the global financial crisis.

Australia's benchmark S&P/ASX 200 Index ended yesterday 5.1 points higher at 4353.3 a gain of just 0.12 per cent.

The dollar surged as much as US4? to an eight-week high, even as expectations spread that the Reserve Bank might cut the cash rate on Tuesday. Last night, the Aussie was trading at $US1.067, after climbing above $US1.07.

European leaders this week announced a plan to shore up their bailout facility, pledging new funds for Greece and persuading banks to agree to major write-downs in an accord reached after two successive summits.

There will be "voluntary" restructuring of Greek government debt equivalent to a haircut for bondholders of 50 per cent, which it is estimated will reduce Greece's general government debt ratio to 120 per cent of gross domestic product.

As part of the plan, euro zone leaders agreed to leverage the ?440 billion ($A584 billion) European Financial Stability Facility to ?1 trillion.

While equities rallied, some bond and credit markets barely reacted to the European plan, suggesting doubts about whether this week's agreement will turn out to be a long-term solution for the region's substantial debt problem.

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Frequently Asked Questions about this Article…

What caused global markets to rally this week and is the eurozone debt plan the reason?

Stocks jumped after European leaders announced a plan to shore up their bailout facility and boost funds for Greece. The article says markets from London to New York opened higher and Australia surged on Thursday, with investors reacting positively to the eurozone measures — though caution remains about whether the plan is a long-term fix.

How did the Australian share market (ASX) perform after the eurozone announcement?

According to the article, the ASX had its best week in over two years with a 5.1% weekly gain — the biggest since July 2009. On the day referenced, the S&P/ASX 200 Index closed 5.1 points higher at 4,353.3, a modest daily rise of 0.12% as the initial enthusiasm faded.

What specifically did eurozone leaders agree to for Greece and how might that affect investors?

The article reports eurozone leaders agreed a 'voluntary' restructuring of Greek government debt equivalent to a roughly 50% haircut for bondholders, which is expected to reduce Greece's debt ratio to about 120% of GDP. For investors, that means existing Greek bondholders could face large nominal losses, and it highlights continued sovereign risk in the region.

What changes were made to the European Financial Stability Facility (EFSF) and why does that matter?

Leaders agreed to leverage the EFSF from €440 billion to about €1 trillion. The article suggests this boost is intended to increase the eurozone’s capacity to support struggling countries, which helped spur equity rallies but did not fully reassure credit markets.

Why did bond and credit markets barely react even though equities rallied?

The article notes that while equities rallied on the eurozone plan, some bond and credit markets barely moved, implying investors in fixed income remain doubtful that the agreement is a lasting solution to Europe’s significant debt problems.

How did the Australian dollar (Aussie) respond to the news and what were the reported levels?

The article says the Australian dollar strengthened, climbing above US$1.07 at one point and trading around US$1.067 later. The rise came despite expectations that the Reserve Bank might cut the cash rate on Tuesday.

What did market leaders say about the eurozone agreement and investor sentiment?

Macquarie Group chief executive Nicholas Moore is quoted saying markets have been very focused on Europe and that recent responses give a feeling of satisfaction with what’s come out so far. He added there is cautious hope but acknowledged uncertainty about where things will end up.

What should everyday investors take away from this week’s market moves and eurozone developments?

Based on the article, everyday investors can note that short-term market sentiment improved after the eurozone plan (reflected in a strong weekly ASX gain), but important doubts remain—especially in bond and credit markets—so continued caution and awareness of ongoing European debt risk are warranted.