Week Ahead: Europe Deadline Nears
Another week, another deadline missed for Europe. Although German Chancellor Angela Merkel and French Prime Minister Nicolas Sarkozy previously promised that October 23rd was it---the date by which the European Union would finally address the sovereign debt and banking crisis, last Thursday they said a comprehensive plan will be unveiled at a second EU summit to be held by Wednesday October 26th. For more detail, see "Europe Nears Crisis: Weekend at Bernie's Redux").
The EU must address these three issues:
1. Greece itself: the previous Greek bailout will not be enough, as the country slides further behind in its obligations. Economists predict that Greek GDP growth will be 7.25 percent lower between now and 2020 than was expected back when the deal was crafted in July. Forecasts warn that Greek sovereign debt will peak at an alarmingly high 186 percent of GDP in 2013 and decline only to 152 percent of GDP by the end of 2020. Even in 2030, Greek sovereign debt would still be 130% of GDP - double the ratio that most would argue is a sensible, sustainable ratio of debt to GDP.
2. Other at-risk countries, like Italy and Spain: the EU, ECB and the IMF (aka "The Troika") must bolster the $600B bailout fund (the EFSF) in order to protect the Greek contagion from spreading to much larger economies. It appears that the fund will use leverage to beef it up to at least $1 trillion, although most experts believe that it will have to reach more than $2 trillion to stabilize the situation.
3. European Banks: The banks (especially French banks) own lots of Greek debt. If Greece defaults, or if Greek bonds are worth less than the already-reduced value at which the banks are holding them, the banks will falter. To continue operating, European banks will need more money, from either the private sector (other banks or investors around the world who are brave enough to lend them money) or from euro bail out fund (more likely).
By the end of the day Sunday, European Commission President Jose Manuel Barroso said "work is in progress and progressing well." Barroso and European Council Chairman Herman Van Rompuy said European leaders have already "outlined [a] strategy" for addressing the economic crisis, and will provide details of their plan "within the next 72 hours."
There wasn't a trader on Wall Street who wanted to go home short ahead of the weekend, so the mezza-mezza week turned into a mostly winning one, after Friday's broad rally. The Dow notched its fourth straight weekly gain, its longest winning streak since January. The measure is up 2 percent this year and yes, that does feel like a victory!
- DJIA: 11,808, up 1.4% on week, up 2% YTD (up 9.6% over the last four weeks)
- S&P 500: 1238, up 1.1% on week, down 1.5% YTD (up 9.4% over the last three weeks)
- NASDAQ: 2637, down 1.1% on week, down 0.6 % YTD
- December Crude Oil: $87.40, up 0.5% on week
- December Gold: $ 1636.10, down 2.7% on the week
Total bank failures for 2011 = 84 (4 new bank failures over weekend)
FACTOIDS OF THE WEEK: Global Markets Edition
Perhaps you didn't realize that the US stock markets are actually faring pretty well, relative to the carnage experienced across the globe. Here's a quick YTD snapshot:
- S&P 500: -1.5%
- Stoxx Europe 500: -13.4%
- Italy FTSE MIB: -20.1%
- DJ Asia Pac: -15.4%
- Hong Kong Hang Seng: -21.7%
- DJ Americas: -4.6%
- Brazil Bovespa: -20.3%
Mon 10/24:
8:30 Chicago Fed Activity Index
Tues 10/25:
3M, Amazon, BP, Coach, DuPont, UPS, Xerox
9:00 Case-Shiller Home Price Index
Weds 10/26:
Boeing, Visa
8:30 Durable Goods Orders
10:00 New Home Sales
Thurs 10/27:
Colgate-Palmolive, P&G
8:30 Weekly Jobless Claims
8:30 GDP - Advance for Q3
10: 00 Pending Home Sales
Fri 10/21:
Chevron
8:30 Personal Income and Spending
9:55 Consumer Sentiment
