Of course, the question begs-how long will this one last? As usual I don't want to be pessimistic and hope this one is real and not another false start... But, of course, the track record speaks for itself.
Today saw a huge rally in markets with the Dow up way over 200 points and with the US indexes now in line for their best June in a long time-usually June is supposed to be the second worst month of the year. And this is not being driven by the Fed or any American phenomenon:
"It's all Europe. The steps that are being taken now seem to be a little more dramatic and important, and they've acted a little more rapidly than in the past," said Mike Gibbs, co-head of the equity advisory group at Raymond James Financial, RJF +2.69% which oversees $370 billion in client assets."
"European leaders at a two-day summit in Brussels said they would speed plans to create a single supervisor for the euro zone's banks. They agreed that the euro zone's bailout funds should be able to directly boost the capital of struggling banks, without adding to government debt."
http://online.wsj.com/article/SB10001424052702303649504577496232944181156.html?mod=WSJ_hp_LEFTWhatsNewsCollection
That last part is the key-the funds can go right to build up the capital of struggling banks rather than through the governments and so the aid will not add to government debt. This is a very big deal, still what's going to happen when Angela Merkel goes back to Germany?
“It’s going to be very interesting when [Merkel] tries to sell this to the German people because this is a very unpopular decision on her part to compromise, but this is a breakthrough that we’ve been waiting for and it bodes very well for the markets,” said Michael Yoshikami, CEO and founder of Destination Wealth Management. “You buy based on probability and this is definitely a move forward towards Europe stabilizing.”
http://www.cnbc.com/id/48011828
Euro stocks soared as well and most importantly Spanish and Italian bond yields fell. This tells you that they hit the sweet spot for once. Often you see equities soar until the bond investors give it a thumbs down. Still, surely one doesn't want to lose all perspective here.
"It's a reminder of how little people expect coming out of any of these summits," said Andres Garcia-Amaya, global market strategist at J.P. MorganJPM -0.61% Funds.
"This begins the road map to creating a pan-European banking union by year end," Mr. Garcia-Amaya said. "It gets you closer to that integration that you want to see within Europe, so that's big, but it's just words for now. We need to see the details."
http://online.wsj.com/article/SB10001424052702303649504577496232944181156.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Yeah, details are always nice... What's certainly worrisome is just how much euro-unity there really is. It seemed too good to be true this morning and now that different European leaders are home they seem to understand the agreement rather differently:
"European leaders' new measures Friday to tackle the euro zone's debt crisis—promising to use their sizeable rescue funds more flexibly and pave the way for the European Central Bank to assume an expanded role as supervisor for the euro zone's banking sector—were welcomed as a rare bold step in the right direction."
"But the unexpected statement of unity issued in the small hours of Friday morning gave way almost immediately to a wave of ifs and buts, as briefings by national leaders once again highlighted the residual divisions between them."
http://online.wsj.com/article/SB10001424052702303649504577496452961191554.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Some understand the agreement one way:
"In stark contrast to his German and Dutch counterparts, French President François Hollande said a key clause of the ESM had been changed to allow decisions to be made without unanimity.
Unlike the EFSF, Mr. Hollande said, the "ESM has an advantage, namely that it doesn't have unanimity." Once the EFSF had been replaced by the ESM, the need for full unanimity would be removed, he said."
Others understand it another way:
"The comment surprised EU officials, who said Mr. Hollande's view wasn't in line with the current ESM treaty, which will be ratified by France and other countries in the coming weeks.
"If Hollande said this, we might as well all go home and scrap the ESM, because this was not what was agreed in the ESM treaty," a diplomat from one euro-zone country said."
Yes, 'might as well go home and scrap the ESM.' Then others have a different view:
"By contrast, German Chancellor Angela Merkel, at pains to stress that she had given nothing away in a night that saw a big shift away from previous negotiating positions, told her press corps that the German parliament would still retain effective veto rights over anything it didn't like in the new ESM. Not only would it have the right to vote on every single use of ESM funds, but it would also retain the right to vote down these or any other proposed changes to the way the ESM works."
There's the problem that what Germans want to hear is more or less the opposite of what markets want to hear. In case you want to temper yourself with even more pessimism listen to El-Erian:
"Mohamed El-Erian, CEO at bond giant Pimco, was even more direct about his skepticism, cautioning investors not to get too excited about a deal in which "the road map to fiscal union, political union and banking union lacks details and lacks precommitment."
"It's an important step but there's risk that it's not enough, and we worry that investors are going to use this to exit rather than crowd in more capital," El-Erian told CNBC."
So we'll keep our fingers crossed. Still it's clearly the biggest move yet. Next week we'll figure out if it's enough. It's tough to imagine Merkel, Draghii, and Hollande hittimg the level achieved by Keynes and White in the 1944 Bretton Woods Agreement but let's not be overly pessimistic. After all look at Chief Justice John Roberts if you don't believe miracles happen.
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