October 26, 2011 / 5:53 AM / 6 years ago

Investors brace for euro zone debt decision

LONDON (Reuters) - Investors stayed cautious ahead of a summit expected to deliver pledges to tackle the euro zone’s debt crisis rather than firm commitments, keeping the euro above $1.39 as stocks markets traded little changed.

Core euro zone government bond prices were also flat.

Market expectations that EU leaders will come up with a comprehensive solution to the debt problem have dipped as political wrangling ahead of Wednesday’s meeting has continued.

Investment bank Citi said it was a “numbers game, without the numbers.”

While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there is little clarity on two other critical parts of the package.

Those are how to scale up the region’s rescue fund and how much of a loss private bondholders will take on Greek debt.

“They can’t quite pull the rabbit out of the hat yet, though they will probably get something better over time,” said Lothar Mentel, chief investment officer at Octopus Investments.

He suggest that markets would react badly to any failure to come up with a plan, but there was no early sign of that.

World stocks as measured by MSCI were flat while the pan-European FTSEurofirst .FTEU3 struggled to gain 0.1 percent.

The latter was buoyed somewhat by corporate earnings. Sweden’s Handelsbanken (SHBa.ST) reported a better-than-expected rise in operating profit in the third quarter.

Bank of America-Merrill Lynch said there was scope for a tactical stock rally even if the EU summit disappoints because investors are holding a lot of cash and are bearishly positioned.

    EURO STEADY

    The euro inched higher versus the dollar, with analysts saying that the fact it remained within sight of a six-week high of $1.3959 hit the previous session showed many investors were still hoping for a positive summit outcome.

    The dollar was generally weaker on expectations that the Federal Reserve may opt for more monetary easing following weak economic data.

    It has lost nearly 5 percent against a basket of major currencies since a high at the beginning of October.

    Core German debt was flat pending news from the EU summit.

    “What Europe needs is a clear, quick-to-implement and easy-to-fund solution ... (T)here is a clear risk that we get a vague plan with no specific timetable and specific numbers,” Lloyds TSB said in a note.

    Additional reporting by Brian Gorman, Dominic Lau and Kirsten Donovan; Editing by John Stonestreet

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