For the umpteenth, this is the key week for European officials in convincing the markets that they are taking steps to both focus on the crux of the problem, too much debt and little growth and fight the aftermath of higher bond yields and stress in the banking sector. While we’ve seen many summits and agreements over the past few years, this week may actually be the most important as market stress a few weeks ago definitely hit a tipping point for the entire region. Monti’s gov’t in Italy unveiled a 30b, 3 yr deficit reduction plan, almost 2% of GDP. As comparison, the US Congress couldn’t agree to 1% of deficit reduction over 10 years. There is nothing like a bond revolt though to focus a politicians mind. The market likes the plan as Italian bond yields are falling sharply and its also taking Spanish, French and Belgium yields lower too. The Italian stock market is rising to the highest since late Oct. Also, the Merkel gov’t is said to not want to interfere with any plans the Bundesbank has in lending money to the IMF which a German newspaper said the Bundesbank is ready to make. Merkel and Sarkozy will meet again today to prep for the end of the week EU summit and will try to dot the i’s and cross the t’s to a new fiscal union agreement. The ECB on Thurs will likely cut rates 25 bps and announce new 2-3 yr lending facilities to supplement the current 13 month one. The one fly in the market ointment today is the action in China. The Shanghai index has given back the RRR cut as it fell to a 6 week low after the HSBC PMI services index fell 1.6 pts to a 3 month low at 52.5.
