(By Mike Kulej) Leaders of Germany, France, Italy and Spain met in Rome in preperations to the EU summit next week. They announced several measures and proposals aimed to strengthen the region's faltering economy and its financial system. The biggest single initiative is a push for a growth package worth up to EURO130 billion at a European Union summit next week that's intended to kick-start the economy and safeguard the currency bloc. While the size of the growth package would be modest, about 1% of the euro alliance's gross domestic product. However it marked a recognition by Merkel that more government spending would be needed. It is not clear, where this money would come from, but the package could include funds from unspent European Union structural funds, the European Investment Bank and European project bonds – debt sold to finance cross-border infrastructure projects.
In a separate announcement, the European Central Bank said it would make it easier for banks to receive its loans by accepting more kinds of securities as collateral. The shift could support Spain's hard-pressed lenders, though it means more risk for the ECB's own finances. Markets certainly like these developments, but they will only have lasting impact if the EU summit leads to concrete steps and action. That of course, is the real obstacle. Over the past few years there have been countless meetings and summits and to date they amounted to very little, if anything at all. The Union's leaders may lose any remaining credibility if the summit on Thursday and Friday produces no results.
Currencies settled down on Friday, as if "placated" with promises, but waiting for their confirmation. This could mean quiet opening. Unlike in the past two weeks, chances of gaps developing today are small. In addition, the economic calendar is empty in early trading, so there could be no catalyst to create volatility. This leaves geopolitical events as market movers and these are unpredictable in nature. Before placing new trades, I want to see if the selloffs from Thursday mark the new direction, or small Friday's rebounds extend.
Mike K.