| New year, more event risk |
| 14.12.11 08:01 | |
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The market reaction to the December 9 EU summit has been relatively subdued so far, as investors seem to be repeating the "buy the rumour, sell the fact" pattern. It is not yet clear that the market is interpreting the summit as a failure; the current risk asset jitters may be partly due to the apprehension ahead of this week's Italian and Spanish government bond supply, as well as the residual uncertainties over the effectiveness of the summit measures. Our Global Macro Survey taken in November suggests that the summit itself is perhaps in line with investor expectations. 59% of rates investors believed that policymakers would arrive at a partial solution that would act as a stop gap. Meanwhile, 58% of equity investors believe that equities will be stuck in a range trade of -5% to +5% into year-end. It seems unlikely that investors will take a strong directional view into the holiday season as the markets become even more illiquid. Thus, a true assessment of the summit will probably emerge only in the new year. The only apparent certainty is that event risk will continue to dominate for the next quarter, even if we progress toward a gradual stabilisation of the crisis. As highlighted in Global Outlook: A cautious step forward, we believe that the summit provides the foundations of a sustainable framework. Unfortunately, this is not enough to support a sharp risk asset rally, as uncertainties about implementation should persist. On the other hand, the tail risks have also been reduced to some extent. The key question for next year seems to be what are the triggers or signals for investors to turn constructive on risk assets? We list just some of the potential market moving events below to watch for over the next quarter, around which we expect frequent bouts of volatility. ECB policy meetings may still be met with investor speculation for increased SMP intervention. Enhanced IMF resources may play a key role in bridging the financing gap and reducing the pressure on the ECB to intervene. Nonetheless, speculation is likely to remain high. source: BarCap |
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