MARKETS TRADED IN a volatile fashion in the week ended Dec 9, with investors quickly reacting to news and rumours surrounding responses to the ongoing European debt crisis. Thanks to a late rally, markets ended the week in positive territory, with the Dow Jones Industrial Average climbing 1.4% to 12,184, the Standard & Poor’s 500 Index climbing 0.9% to 1,255 and the Nasdaq Composite advancing 0.8% to 2,646.

 

Recent market action centred on the recent European summit. While no one is suggesting that the debt crisis will go away any time soon, the framework agreement that was reached has at least reduced some of the anxiety and appears to have eased the gridlock in Europe and financial markets.

 

Although there are many details that still need to be worked out, it does appear that most parties in Europe are in agreement about the need to establish a more stable fiscal union that has tighter controls over the region’s debts and deficits. While these moves will do little to ease the near-term debt issues affecting many European countries, they are important in that they represent the start of the process of assuring investors and central bankers (particularly the European Central Bank) that politicians are serious about fiscal discipline and that they can no longer delay action. In Black- Rock’s view, the summit may well represent the first tangible positive developments since the crisis began.

 

For its part, the ECB did cut interest rates by another 25 basis points recently. This is an important step and mirrors the broader global trend of central banks moving from a tightening to an easing bias that has occurred over the course of 2011. The ECB, however, stopped short of indicating that it would be willing to provide further support for the European banking system. It has clearly been unwilling to take up the charge of being a lender of last resort for the region, but it does seem likely that the central bank will become more proactive if it sees real progress being made in terms of greater fiscal stabilisation.