Jayachandran/Mint

Jayachandran/Mint

Ourview | Markets after Europe’s rescue

Ourview | Markets after Europe’s rescue

At least a rerun of the Lehman collapse is no longer on the radar. That is the unambiguous part of the message sent out by the European leaders after their summit. The two most important measures are a “voluntary" 50% haircut to be taken by holders of Greek bonds and an increase in the size of the European rescue fund to a trillion euros. Other initiatives include a recapitalization of European banks, a signal the European Central Bank will continue with its bond purchases, a commitment from Italy it will do more to rein in its public debt and a further injection of funds into the Greek economy.

Jayachandran/Mint

Nevertheless, the markets have been reassured. European stocks and the Euro have rallied sharply. As a result of the summit, a solution is now in place that considerably increases the firepower needed for dealing with the sovereign debt crisis and for ring-fencing European banks. Of course, after the extremely tortuous and nail-biting negotiations, speedy implementation is the key to restoring confidence.

The markets had been hoping for a deal, seen from the fact that despite all the uncertainty, the MSCI European indices were well into positive territory this month, even before the agreement was announced. A rally in risk assets has been on for some time and the MSCI Emerging Markets index was already up over 9% this month last Wednesday. The European deal will boost the optimism further. Nor is Europe the only source of good news. The data from the US have been better than expectations. The September PMI numbers for China show the manufacturing sector continues to expand. And in many emerging countries, including India, we are at the end of the monetary tightening cycle.

True, the deal in Europe may only be a temporary one, as the structural problems continue. It’s worth remembering that the flash Eurozone PMI for September came in at its lowest level since July 2009 and shows the economy is contracting. And it’s undeniable that global growth is very weak. But what the European deal has done is buy time. Taken together with continuing loose monetary policy in the developed world, that should set the stage for a rebound in risk assets in the near term.

Does the Greek deal foretell normality in markets? Tell us at views@livemint.com

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