It was a crazy week. Markets Up and Markets Down, the EURO up and the EURO down. Oil hits highs, and gold falls. All week no one knew exactly what to expect. As the week, drew to the grand finale, the EU Summit, investors nerves were frayed. Traders did not know what to expect.
Early, in the week, the Euro was strong, due to statements from Sarkozy, Merkel and the ECB. It looks like great strides were made. Plans were being formulated and agreements been negotiated. By mid-week, the President of the ECB threw a wrench into the plans and made some negative comments and the euro plunged. The EUR/USD was gaining strength and the US dollar was picking up momentum.
From the sidelines came the warning from S & P on the possible future downgrade of many European nations. A bleak warning of what was ahead. Global markets fell and currencies dropped.
As the week came toward the crescendo, Mario Draghi, President of the European Central Bank, really tossed a lion into the den of sheep. First the ECB lowered their interest rate by .25% a move that the markets were predicting.
This was followed up by announcements on Thursday at the conclusion of the ECB meeting, in which ECB President Mario Draghi laid out 3-pillars for the “Fiscal Compact”.
He also stressed the ECB will not use QE nor will it purchase unlimited amounts of European bonds. The EUR fell below the 1.33 level following the disappointing comments. ( read the full statement )
Mr. Draghi remarked that he was “kind of surprised” at how markets spun his earlier comments. But he shouldn’t have been, analysts say, given how focused investors around the globe were for any tidbit of his thinking.
News began to leak out of the EU Council and the EU Summit and then became evidently clear that David Cameron, UK Prime Minister, would not agree to the new treaty without additional guarantees, that Merkel and Sarkozy, were not about to offer or accept. Depending on your view point, they either forced the UK out of the EU or Mr. Cameron, walked.
Still the markets were amazingly quiet. All predictions and suggestions were for turmoil all day on Friday, with disastrous effects on the Euro. But there was little movement and the Euro ended up in positive territory.
Global Watchers have been totally surprised by the fact that Merkel and Sarkozy were able to offer a new pact to the remaining EU countries without Britain and find mutual consensus not just among the 17 nations on the eurozone but also of an additional 6 other EU member states. It looks like the EU will survive, with new rules and regulation, and that the ECB will support this move.
Again markets did not surge or plunge. Investors seemed to be shocked and amazed. The comments heard on the exchanges were diverse, but the overall opinion, was at least the EU Ministers showed leadership and a plan. It is still a difficult road ahead and tensions will grow, many countries will have difficulty implementing the new fiscal pact, many countries will have to explain austerity measures to their citizens.
The world is hoping that we have the first steps of global recovery. It looks like all parties are working together. How will the markets react this coming week is a guess. What is going to happen when investors and economists have had time to interpret this new accord? No one knows but it will be a bouncy ride in the short term.