Asian Markets Open With A Bang While The Rest Of The World Contemplates The EU Debt Crisis

Asian markets shot up this morning in response to Friday’s announcements from the EU Summit and the ECB. Asian exchanges were closed by the time final decisions were became public on Friday. Following the release of the “fiscal plan”, US markets rebounded on Friday.

Japan’s Nikkei Stock Average jumped 1.3%, Australia’s S&P/ASX 200 index increased 1.2% and South Korea’s Kospi was up 1.1%.

This morning Australia released their latest trade and export data, Australia’s seasonally-adjusted trade surplus declined to 1.6 billion Australian dollars ($1.6 billion) in October, from A$2.2 billion in September, the Australian Bureau of Statistics reported Monday. Exports totaled A$27.3 billion in seasonally-adjusted terms, while imports totaled A$25.7 billion, according to the ABS data. Economists were disappointed in the 1.6 billion surplus they had been expecting a trade surplus of A$2.0 billion.

Yesterday, the Bank of International Settlements  wrote in their quarterly release an endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks.

“A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS report further stated. “Only the currency-issuing central banks have this ability.” The BIS’s paper was its latest in a series analyzing the concept of global liquidity, and focused again on the interplay between official liquidity, that is, created by central banks, and the far greater liquidity created by the private sector on the basis of central bank money.

Economists, government finance ministers, and investors have had the weekend to digest the volume of news and plans released last week ranging from the UK departure from the EU, the ECB interest rate reduction and comments, the “new fiscal pact” for Europe, the short term and long term effects on the debt crisis throughout the world.

The biggest fear for now is, on the short term, the austerity measures each government will need to impose will effectively put the brakes on European economies and growth.  The eurozone leaders today have by passed a plan to deal with the current crisis, their new pact although a way to prevent future problems, does not deal with the current debt crisis in Europe. Germany and France have used these difficult economic times and global pressures to manipulate the countries of the EU into this pact without dealing with the current problems. The fiscal pact will take months to be finalized, and is just the starting point for negotiations between EU members.

If the markets lose faith in the EU leaders, or to much bickering and trouble erupts while trying to implement this new pact, the markets could react severely. Merkel and Sarkozy are only safe as long as the markets believe they can pull their plan off. As to the current situation, the markets are nervous, investors are worrisome.

This leaves the global economy exposed to further financial turmoil in the weeks and months ahead. Already, emerging markets are facing a credit squeeze as Europe’s banks sell assets and bring money back home to strengthen their balance sheets. This looks set to worsen after the European Banking Authority last week said the region’s banks must raise 115 billion euros in extra capital.

International trade credit also is tightening as European sovereign credits are downgraded, pushing the cost of government-backed trade insurance above those for emerging countries.

The U.S. is alone among major developed economies in reporting its economy is gradually improving. Consumer sentiment brightened in early December, auto sales are climbing, order books are filling up and unemployment is retreating. This will strengthen its resilience against the global slowdown and Europe’s woes. It by no means says that the U.S. is out of economic woes and this good news can turn bad quickly. No country is a financial island. We would feel the effects of the slowdown spreading in the first quarter of next year.

If the European crisis is contained, analysts say it will shave only a few tenths of a percentage point off U.S. GDP growth, currently seen around a 2.5 to 3 percent rate. But the financial contagion could worsen and pull down growth.

The Federal Reserve at its Tuesday meeting is expected to take no fresh action to support growth, although it may discuss ways to communicate the future path of its monetary policy in preparation for any additional easing measures next year.

Much of Europe is widely seen as already in recession. Even in Germany, the euro zone’s powerhouse, the central bank slashed its 2012 growth forecast last week to 0.6 percent from 1.8 percent. An early read of the PMI manufacturing survey due on Thursday will measure the speed of the downturn.

The world still sits and waits on Europe’s grand plan, the ECB and the IMF seem to be in holding patterns. The IMF is facing difficulties raising funds as countries want to know their exact plans and guarantees before adding money to their emergency funds.

There should be a lot of stress on the euro and the gbp this week.

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