EmailThe way things have unfolded in the eurozone the last few days, it is becoming evident that three things need to happen to make the U.S. equity market feel better about the eurozone outlook.
The first thing is that all leaders need to announce their impending resignation. Such news appears to be good for a relief rally just when one is needed.
The second thing is that it must be indicated that a new "unity government" will be formed and that a vote on budget reform measures will be expedited (not necessarily in that order). Such plans appear to calm the credit markets.
The third thing is.... the third thing is... uh... the third thing should be to... it's on the tip of our tongue. The third thing is to get rid of the EPA. Yeah, that's it! Oh wait, wrong country. Sorry.
The third thing for the eurozone, whatever it is, is sure to be a charm. It has to be, right? After all, that's how the saying goes.
For now, the capital markets appear content that Greece and Italy are covering steps one and two in a bid to restore market confidence in their political and economic will.
Italy is taking the lead in that respect today, as its senate has approved budget reform measures. The next step is for Italy's lower house of parliament to do the same. It is expected that body will follow suit, thereby expediting Berlusconi's departure and clearing the way for the formation of a unity government.
This sequence of events, or the expectation that this sequence of events will play out, has underpinned the Italian bond market today, where the yield on the 10-year Note has dropped to 6.60% from the unsettling environs of 7.00%. In turn, European equity markets are sporting gains between 1-2%.
Not surprisingly, Europe's disposition is carrying over to the U.S.
The S&P futures are currently trading 1.2% above fair value, which will enable the cash market to extend yesterday's rebound effort that saw the S&P 500 gain 0.9% on the heels of a 3.7% decline on Wednesday.
If the cash market is able to maintain its current track, it should manage to end the week higher. The line of demarcation there for the S&P 500 is 1253.23.
The equity market will be on its own today, too, since the Treasury market is closed in observance of Veterans Day.
The ever-present risk is that something goes awry in the eurozone's political arena or that perhaps social rebellion intensifies in coming days on the prospect of having to digest additional reform measures, calling into question how effective the temporary unity governments will be.
The capital markets may feel better about the eurozone outlook today than they did a few days ago, but to think they feel altogether better about the eurozone outlook would be overstating things at this juncture.
In other words, we probably can't say arrivederci to all of the volatility just yet.
--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.
