Market Reaction to a Hint of Political Direction

In a previous post I offered my view on market pressure influencing the actions of subordinate politicians. It would appear, however, that during the course of this week, leaders have stepped up their game (ever so slightly) and may even be regaining control of the situation. Germany and France have reiterated their support for Greece and talk of the Euro Bond is becoming ever more potent. Don't get me wrong, this positive progress could be reversed in a second but for the time being the markets are seeing a modest recovery. With regards to authoritarian sentiment weighing towards Euro Bond implementation, this article by Reuters is extremely useful.


http://uk.reuters.com/article/2011/09/15/uk-eurozone-eurobonds-idUKTRE78E1CE20110915


In this post, I'd like to take the chance to reiterate the importance I place behind a top-down approach to tackling this crisis. Let's take a look at what has sparked positive movements in the FTSE100 this week:

On Tuesday, fresh concern arose around an imminent Greek default (an economy which is due to run out of cash in October if the latest tranche (8bn euros) of the EFSF bailout package isn't forthcoming. As per usual, the market tanked as investors faced the uncertainty of the resulting impact of the inevitable (the yield of 146% on Greece's 1 yr bond says it all). Since however, it has rallied mainly due to two signs of political strength (or should I say hope?):

• Merkel & Sarkozy reassured markets they simply wouldn't let Greece tumble out of the Euro Zone.
• Whispers of a Euro Bond arose around the corridors of parliaments around Europe.

Although seemingly insignificant 'actions,' this is raw demonstration of the importance of political leadership in today's market. Negative news continues to tumble in (UBS's $2bn hit, World Bank chief stresses the danger the economy faces etc.) but political union has trumped to deliver a rise.

Merkel now needs to swallow her pride, stop hiding behind her prized AAA gov. bond and take control of the situation. Unfortunately, as I write, this just in;

http://uk.reuters.com/article/2011/09/15/uk-eurozone-idUKTRE78E1XW20110915