Friday, December 09, 2011

Europe muddles on

Although there is some preliminary relief after some agreement was reached at the EU summit, this is not the end of the story, but merely the latest episode in a long and slowly-unfolding drama. Now they (we) move on to the next step in the process, whatever it might be. It's not that they don't know what needs to be done, but it is mostly a political issue rather than simply a technical finance issue. The politics in Europe are rather complex and can be rather slow-moving. Whether the market will be truly placated by this latest move or whether markets will react negatively that a more complete packaged solution has not been put in place remains to be seen.
 
There is a fair chance that we might see an initial pop, but with a lot of "sell into any rally" sentiment that turns it into another decline. OTOH, there may have been an excess of selling yesterday in expectation or worry of an even worse EU summit outcome, so we could see a relief rally from that, especially if there were an excess of short selling as the Dow breached the psychological 12,000 level right near the close yesterday, which could fuel a modest-sized short-squeeze rally.
 
But as important as Europe is to the U.S., people will ultimately still be placing bets as to what they perceive the economic outlook to be in 2012. Europe will likely be a drag, but Europe is not everything. Besides the U.S. has been getting quite a boost from foreign tourism, especially here in New York City.

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