31 January 2012 at 9:28 GMT
“Failure is unimportant. It takes courage to make a fool of yourself” – Charlie Chaplin
Yesterday was a day of reflection to a certain degree as risk and risk assets pared back some of their gains from what has been perhaps a surprisingly upbeat 2012 so far. However, developments overnight have provided a springboard for that risk tempo to extend into February.
Last night Europe took a step towards fiscal union as 25 members of the EU27 agreed to a pact under which signatories (which will likely be ratified by the end of March) agreed to cut budget deficits and reduce national debt (as a proportion of GDP) or face ‘automatic fines’. In addition to this the council also agreed to bring forward the European Stability Mechanism (ESM) by one year to July 2012, as has been much mooted in recent weeks. The ESM is a formal replacement to the temporary EFSF, however hopes that the two bodies could run in parallel for a while (hence boosting the overall firepower of the European ‘firewall’) were dashed by German parliamentary disapproval yesterday.
Despite the slight disappointment for Merkel that the two ‘protection’ funds cannot run alongside each other, the agreement yesterday will be seen as a victory for Merkel, who has long been pushing for ‘more Europe’ in the form of tighter budgetary constraints and central accountability – fiscal union.
Cameron statement
David Cameron refused to agree to the proposed constraints from the European Union in last nigh'ts meeting. Despite his promises from the previous EU summit that he would block the new treaty from using EU institutions (such as the European court of Justice), he insisted that the agreement “places no obligation on the UK” and went on to say that…
“Our national interest is that these countries get on and sort out the mess that is the euro”
… after 27 summits in two years it is unsurprising that comments such as that of Polish PM that EU measures are “insufficiently courageous” and the Economist quote “EU leaders are at a fork in the road. They’ll probably go straight on” are widespread.
In terms of the UK it is perhaps important that the Czech Republic also refused to agree to the budget pact. A unilateral rejection may have left the UK seeming Isolated from the rest of the EU and could indeed have left the UK in a difficult position within the global investment community.
Light forex activity
In FX, activity has been relatively light in the recent risk rally, yet for me the moves in EURCHF and USDJPY are indicative that the ‘risk-off’ trade is not over and that there is further downside risk for the EUR. I still see opportunities in a EUR short via GBP, and while there is a risk that an agreement on the Private Sector Involvement (PSI) will generate one more rally, the reality of a rising growth differential between the UK and the eurozone will likely become increasingly apparent.
Today's calendar contains the release of a range of data from around the globe and broad risk sentiment is likely to shaped by this. The tone to equities is likely to be more positive in the short term and a rally today, given that the S&P held 1300 yesterday should be seen as a further positive.