DAVID ROSENBERG: We've Seen This EU Story Before, The Markets Are Setting Up For Disappointment

david rosenberg

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Stock markets are going nuts right now.Late last night, EU leaders announced that the bailout funds – the European Financial Stability Facility (EFSF) and the future European Stability Mechanism (ESM) – would be used to recapitalize troubled banks in Europe without adding to government debt.

Based on the surging markets, it seems like traders and investors think that this is a step in the right direction for Europe.

But in this morning’s Breakfast With Dave note, Gluskin Sheff economist David Rosenberg said these bank rescue plans are lacking in details. He thinks the only reason why stocks are up is because expectations were so low:

“This goes to show that expectations must have been pretty low for these statements — without much detail (ahh … the devil is always in the detail) — to unleash the huge positive reaction in equities, commodities and the euro and the selloff in various “safe” assets, such as core government bonds and the U.S. dollar.

We have been here before with initial post-summit euphoric behaviour followed by disappointment once investors realise that these vague policy pronouncements have less meat on the bone than was initially thought. But it could well be that the markets believe all this is a sign that when pushed to the brink, Merkel will blink.

For now, it’s about the belief that the euro area has bought some more time (though this cuts both ways — it just means ongoing volatility until there is a concrete resolution at hand.) For the here and now, we have some short- covering and end-of-quarter window dressing underpinning the price action in the marketplace (in a matter of minutes, the S&P 500 is back trading near technical resistance levels).”

For now, Rosenberg expects market volatility to continue and warns that the global economic downturn is continuing and getting wider.

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