It’s difficult to feel comfortable in this environment given the persistent turmoil in Europe. It’s quite clear that Europe did not solve anything last week. This summit was a colossal failure. We seem to forget that just a few short weeks ago the Euro crisis was flaring up and appeared to be right on the verge of causing a full blown credit crisis. Hopes for big action at last week’s summit offered a brief respite and a huge “face ripper” rally as expected. But let’s not fool ourselves – European leaders have failed to generate any sustainable fix and there’s no reason to believe that this crisis is any closer to ending than it was a few weeks ago.
Last week I wrote that the summit had changed nothing:
“I don’t know if we’re going to get a little holiday respite from this EMU crisis, but as I’ve previously noted, the refinancing burden in Italy is very high in the first 4 months of next year. This will almost certainly put pressure on yields and force the EMU into greater action as the crisis flares up again next year at the latest. No, Europe has not been saved and that can they’re kicking is getting much heavier….”
This is still our key. So goes Italy so goes the Euro crisis. Italian yields are back up to 6.6% today. There’s no reason to assume that last week’s lack of action will result in any calming over the sovereign debt fears in Italy. And markets are likely to continue hemorrhaging into the massive debt rollovers next year.
So, we have to wonder now – is the Euro crisis entering a more acute phase? Clearly, European leaders can’t agree to anything that actually solves the crisis. So, we have to wonder if the markets won’t take control from here. Remember, the global government put is an on/off effect that is now clearly in the “off” mode following the grand summit. When I said the equity markets were on the verge of a huge “face ripper” a few weeks ago, I was referring to the rumors that Europe might be on the verge of unleashing a bazooka:
“But more importantly, we should applaud Europe for beginning to acknowledge the depth of their problems and taking the necessary steps to follow-thru on fixing the problems. Let’s hope they actually take firm action in the weeks ahead. The global economy literally hangs in the balance. A bazooka is required and markets will not wait long for EMU leaders to act. I’ve been waiting for a great European leader to step forward, take control of this environment and eliminate this unnecessary solvency crisis. To European leaders, I say – be bold, be proactive, be leaders. The entire world is relying on you.”
European leaders have been weak, reactive and far from anything resembling a leader. I would be very surprised if the markets do not kick this crisis into overdrive in the coming months. Europe is going to confront their moment of truth soon. Their lack of action will continue to cause turmoil and challenge markets. This crisis is entering an acute phase.