THE coming week is likely to be crucial for the direction of financial markets until year-end, with Eurozone stability at stake as well as the latest test of the one bright spot for investors, corporate earnings.
In the case of the Eurozone, there is talk of a “binary” moment next weekend in which a European leaders summit either comes up with the goods to assuage concerns about the debt crisis or disappoints again.
The former might well be taken as a reason for a sustained rally in riskier assets such as equities. The latter would almost certainly spark a sell off.
A comprehensive plan for solving the Eurozone debt crisis at the summit in Brussels has been flagged by Germany and France, raising expectations on markets. Some idea of what is at stake for investors can be seen in their actions over the past few weeks. World stocks as measured by MSCI are up more than 12 per cent since hitting a low on 4 October.
At the same time, yields of both long term US bonds and core Eurozone debt have risen well off their lows. Part of this is in response to expectations of a Eurozone debt roadmap. But it also reflects extremely bearish positioning throughout the northern hemisphere’s summer months.
Asset allocation polls at the end of September showed safe-haven cash holdings at levels that can be a counter indicator for a rally. In effect, investors hold cash so that they can put it to work quickly if the investment climate changes – which may be happening.