EURUSD, equity markets – the Guardian reports about a deal

Two weeks ago the Financial Times reported there was a plan to recapitalize European banks and took the US indices off the ’11 lows igniting an impressive rally that was later prolonged by declarations from Merkel and Sarkozy. Yesterday, just after the moods deteriorated, the British press comes to the rescue again!

The Guardian, citing unidentified EU diplomats reported that the deal between Germany and France to boost the EFSF to 2 bln EUR through guarantees is already in place and will be presented at the summit during the weekend. The newspaper also added that the amount of capital that European banks will need to raise is closer to 100 than 200 bln EUR and that sides are moving closer to deal on (Greek) debt reduction that will increase the haircut private creditors take from 21% to somewhere between 30 and 50%. While all that is encouraging, the devil will be in the details and those are still lacking. For instance it will be important if banks receive some helping hand from the EFSF or if they are given certain timeframe to raise the funds on the market (which could be difficult and painful).

It seems to us that we might have a new agreement in October but we see it not as bold as markets would like to see. It is likely that a) the agreement will lack some details (as it was the case in July) and b) may be disappointing in certain areas (debt reduction might again be seen as too small, banks might be forced to look for capital on the market).

While it’s definitely better than nothing, one needs to look at it from the perspective of current market prices and those do not leave a lot of room for both equities and the EURUSD to advance. Equities will feel the pressure from the ongoing economic slowdown while the EURUSD is set to suffer from the perspective of monetary easing in the euro zone.

Przemysław Kwiecień PhD, Chief Economist

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