Investors are probably scratching their heads right now wondering how risk appetite can be so strong this morning after European officials rejected all of yesterday's rumors about increasing the European Financial Stability Facility (EFSF) and using the European Investment Bank (EIB) to bail the euro out. The reason why the mood continues to improve is because regardless of the denials by European nations that a deal is in the works, the market realizes that if the Europeans are serious about ending their sovereign debt crisis once and for all - and it certainly sounds like they are - they need to announce a major bailout plan in the very near future. It may not take the form of what the U.K. Telegraph or CNBC proposes, but it needs to be equally large and ambitious. In other words, if the market wants a European style TARP, policymakers need to meet or exceed their expectations and based upon recent comments from EU officials, something is in the works whether they admit to it or not.
Optimistic About Greek Vote
At the same time, investors are also optimistic about today's vote in Greece. The Greek Parliament is widely expected to approve an unpopular increase in property tax to show their resolve in slashing their deficit. The Prime Minister even pledged to make a "superhuman effort" to make their debt reduction program a success. Buyers of Italian and Spanish bonds demanded a higher yield at today's auction but the number of bids to the number bonds available for purchase (bid to cover ratio) was strong.
Quarter End Rebalancing Needs
The quarter is also coming to an end and in order to rebalance their portfolios following the sharp sell-off in equities in Q3, money managers will need to buy stocks and high yielding currencies. To clarify further for our new readers, imagine that you are a global money manager with 50 percent of your portfolio in US equities and 50 percent of your portfolio in the German stocks. In the third quarter, US stocks lost approximately 12 percent of their value while German stocks declined by approximately 25 percent. Adjusting for the 6 percent decline in the euro in the third quarter and the drop in the value of German stocks is closer to 30 percent. In order to rebalance the portfolio, you will need to buy both U.S. and German stocks but more euros will need to be bought than dollars.
US Confidence Rebounds but Remains Near 2 Yr Low
Across the Atlantic, U.S. consumer confidence rose slightly in the month of September according to Conference Board. Although this may be a sign that confidence is stabilizing, before getting too excited, it is important to realize that consumer sentiment remains just a hair above its 2 year low. Manufacturing activity in the Richmond region also contracted at a slower pace which is in line with the rebound seen in other parts of the nation. Stronger U.S. numbers should help to sustain risk appetite in the financial markets.
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