2008-10-20

Cross trends


In my perspective, the 6 month Euribor and the Euro/Dollar currency cross are the critical variables on determining whether the current rebound in equity markets will hold or not.

Since the Paris meeting (Oct 12th), where European governments agreed on giving banks explicit guarantees on their loans and also providing banks additional capital to eliminate liquidity and solvency concerns, stock markets have rebounded.

However, the European plan is worth over €1.3 trillion or 15% of Eurozone GDP. If governments across Europe were forced to guarantee interbank loans up to this limit, the Euro monetary union would definitely be challenged (to say the least).

Therefore, if the Euribor continues its downward trajectory that would indicate that investors – specifically banks – have regained some confidence, meaning that state guarantees will not be needed. But if the Euro/Dollar caves in as well that would indicate skepticism from investors on whether European governments will ultimately weather the storm.

For the time being, the Euribor is moving in the right direction. The Eur/Usd is not. Nothing dramatic but nevertheless in the wrong direction. Equity markets are not safe yet.

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