EmailThe European fix is in and market participants appear to be pleased with what they have heard, even though it isn't exactly a plan where all the i's have been dotted and the t's have been crossed. It is good enough for now, however, that there is some context and consensus around a general framework aimed at preventing another banking crisis.
Below we highlight the working points of what has global equity markets breathing a massive sigh of relief this morning as it relates to Europe:
- Leverage the EFSF to €1 tln
- A "voluntary" 50% writedown for private sector holders of Greek debt (i.e. something that is not a "credit event")
- A bank recapitalization plan of ~€106 bln, with banks required to have a 9% Tier 1 capital ratio
- Italy pledging to implement structural reforms to boost growth and to cut liabilities (a specific plan is due by Nov. 15)
- Greece will receive €130 bln aid package, up from €109 bln in July
- China's reported interest in taking on some type of creditor role in the European rescue effort
- An indication from incoming ECB President Mario Draghi that the ECB will continue to buy sovereign bonds as leaders continue to work to get the expanded EFSF implemented
Time will tell if this is "the plan." Implementation risks remain, just as they did after eurozone leaders thought they had an effective framework in place on July 21 for fixing Greece and preventing a banking crisis. We know now "that plan" wasn't "the plan."
Hope is high this morning, however, that eurozone leaders have gotten it right. We are saying that in the most objective manner, too, based simply on what we are seeing unfold in the capital markets.
France's CAC 40 Index is up 5.8% while Germany's DAX Index is up 5.2%; European bond yields have dropped noticeably and credit spreads have narrowed; the euro is up 1.3% against the dollar; commodity prices are jumping; and the 10-year U.S. Treasury note is down almost a full point.
In turn, the S&P futures are up 29 points and are trading 2.3% above fair value, suggesting the cash market is going to shoot higher at the start of trading in a move that will be goosed by a fear of missing out on further gains into month end and ahead of what history has shown to be the best six-month period for the market (November to April). For more on the latter, be sure to read the latest installment of The Big Picture on Briefing.com.
All of the gains in the futures market were achieved ahead of the advance Q3 GDP report, which turned out better than expected, better than feared, and, frankly, way better than all of the doomsday predictions made only a short time ago.
Led by a 2.4% jump in personal consumption expenditures, Q3 GDP increased at an annual rate of 2.5% (Briefing.com consensus +2.3%). That is still below potential, yet it marks the strongest GDP growth since Q3 2010.
Gains in nonresidential fixed investment (+16.3%), exports (+4.0%), and federal government spending (+2.0%) also played an important part in keeping the U.S. economy in a growth mode. Negative contributions from private inventories and state and local government spending subtracted roughly 1.2 percentage points of growth in the third quarter.
Real final sales, which excludes the change in inventories, jumped 3.6% on the heels of a 1.6% increase in the second quarter. That was the strongest pace of real final sales since Q4 2010.
The concise summation of the GDP report is that it shoots down the recession talk as effectively as Maverick shot down those pesky Russian Migs, making it a top gun report in a batch of incoming economic data that have carried the similar message that recession fears in the third quarter were overdone.
Separately, initial claims for the week of October 22 held fairly steady at 402,000, which was exactly what the Briefing.com consensus expected. Continuing claims for the week ending October 15 dropped by 96,000 to 3.645 mln (Briefing.com consensus 3.700 mln).
This is a similar initial claims picture seen in past weeks, which is to say it is still going to prove to be a challenge to bring down the unemployment rate in a meaningful way.
The latter point notwithstanding, the equity market appears eager to set aside the tired narrative of the gloom and doom scenario surrounding Europe and to refocus its sights on fundamentals that underscore the relative value stocks hold for the long term.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
