EU Summit Dinner Ends: No Dessert

The euro came off in a knee-jerk fashion following the conclusion of the EU Summit dinner.  The press statements indicate that nothing concrete came of it, but it did raise the stakes for the end of June formal summit. Since midday in the US on Wednesday, the euro has been in a clear $1.2550-$1.2600 range.  The euro went from the top end of the range to the bottom after the European officials spoke and then quickly rebounded again.   A move above $1.2600 gives $1.2650, but the $1.2700 area is the important hurdle which needs to be surmounted to begin stabilizing the technical tone.  

There does seem to be a consensus emerging for a larger more active European Investment Bank and project bonds.  Details have to be worked out.  There also is a consensus for making it easier for countries to access cohesion funds.   The ECB clearly came under stronger pressure to do more to support European bonds, but it was quickly added that the central bank's independence was respected.   This is the eleventh consecutive week that that ECB does not appear to have bought sovereign bonds (but who's counting?).

Eurogroup head Juncker massacred the English language by noting that the discussion over joint euro bonds was "not unheated."  And it was clear from Italy's Monti that a majority of members want them.  However, as we have cautioned this is not something that will be decided by simply a majority vote.  

The real dividing line in Europe is between creditors and debtors.  Simply, if crudely put, the debtors cannot simply force the creditors to extend them more credit.   Current treaties would have to be re-written.  The creditors' position is clear:  a common bond is the end point of fiscal integration, and most assuredly not the starting point.  

There also appeared to be an agreement that structural funds will be made available to Greece.   This is important even if the amount and conditions are not known.  It is a tacit admission that there was not sufficient efforts made to help Greece grow (support aggregate demand) while it instituted austerity.  This is the fifth consecutive year that the Greek economy is contracting.  

This should help the more moderate forces in Greece presently.  In addition, some support from a couple political parties that did not secure sufficient votes to enter parliament in the election earlier this month for the New Democracy (ND) may also help turn the tide.  The first round and the subsequent world reaction may have been a catharsis for understandably malcontent Greeks.  Some may be done punishing the ND (though maybe not PASOK) and the intensity of the issue may encourage greater turnout, which should also favor a moderate outcome.  

Yet the election is still several weeks away.  It is difficult to see the market maintaining this kind of momentum until then.  When I first suggested that there was a risk of a dollar pullback (May 17), I suggested potential for the euro initially to $1.2785-$1.2850.  The euro topped on  May 21 just below $1.2820. Initially I thought pullback in Europe and Asia on May 22 was a "correction within the correction.  I identified a break of the $1.2700 area as negating the constructive technical outlook.  That said, I remain concerned that positioning is stretched and the key event is still some time away and officials seem intent on trying to walk the jumper off the edge.  This tells me the waters may be more treacherous than it may appear by simply looking at the price action.