For the first time in more than a year, crisis-fighting measures announced at a European Summit are leading to consistent gains in the region’s stocks.
As the CHART OF THE DAY shows, European stocks have rallied on the day following the past five meetings, only to give up most or all of the gains within a week as investor optimism faded. The blue bars indicate the Stoxx Europe 600 Index’s gains in the day after an agreement was announced, while the red and green bars show the movement five trading days after the summit.
German Chancellor Angela Merkel’s comments two days before the June 28-29 gathering that she doesn’t foresee any shared liability for euro-region debt in her lifetime helped to lower expectations of a compromise between borrowers and creditors, according to Philippe Gijsels, a market research analyst at BNP Paribas Fortis Capital Markets in Brussels.
“The market wasn’t expecting anything and something did come out of this meeting,” Gijsels said. “Germany made some major steps toward the other countries and that explains why the market rose and rallied for a longer period of time.”
Leaders of the 17 euro nations dropped the requirement that governments get preferred-creditor status on crisis loans to Spain’s banks and opened the door to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. The leaders also discussed reducing the market pressure on Italy and Spain by allowing them to access rescue loans without relinquishing control of their economies.
“We see the rally lasting longer as investors feel that a fundamental improvement was made,” said Anja Hochberg, head of investment strategy at Credit Suisse Group AG in Zurich. “Before the last summit, investors felt like we were at 45 percent of the solution-finding process -- and now maybe at around 55 percent. Passing that 50 percent line was very important for sentiment.”