Key decisions postponed?

For two weeks markets lived on hopes and speculations centered around the EU summit. Now as the deadline is approaching, politicians once again do not seem to be ready:

It is likely that the EU summit will bring only a decision on banking recapitalization. That is not a tough one (politically) though as banks will be required to look for capital on the market and will get a helping hand from the state or the EFSF only should that  fail. That’s not a good news – a search for capital in a current market context will need to weigh on the markets

A key decision on Greek debt reduction has been postponed until no earlier than Wednesday. That reveals how serious is a row between Germany and France (standing behind the banks) when it comes to accepting losses on the debt. There aren’t many who still believe the fiscal path in Greece is sustainable (we really do not think IIF means that too) and a large reduction is necessary to change this view. There are risks, however, that the compromise will not go far enough and thus the market will judge the issue as a solved one.

There is also a lot of uncertainty about an expansion of the EFSF. But we stress once again that it’s not the most important issue. The EFSF will be required to stop a contagion when banks take losses from the Greek debt but even if a large EFSF is in place, it doesn’t solve the central problem of debt sustainability.

Surprising rise in the Philly Fed

The Philly Fed regional activity index surged in October to +8,7 pts. from -17,5 pts. in September. The combined index from the East Coast rose to 0,22 pts., the highest since May. Looking only at the charts one could nicely compare the whole picture to the previous year when the East Coast suffered a major but a temporary drop in activity whereas the national ISM moderated only slightly. One major difference is that last year it was mostly the US problem while at the moment it’s a global problem with Europe and Asia doing much worse than they did a year ago. However, the data is a good news anyway as it reduces a risk of a significant slowdown in the US in the short term.

Przemysław Kwiecień PhD, Chief Economist

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