Hopes Of A Solution To European Debt Crisis Rallies Stocks

US markets opened higher Tuesday morning on seasonally strong housing prices, and the expectations that the Eurozone policy makers have devised a plan to deal with the European debt crisis.  US president, Barack Obama called on leaders in Europe to take decisive action Monday, warning that the troubles in this region are causing global fear, and urging leaders to act sooner rather than later.

US home prices rose for the fourth month to .9% for July, amid the peak home buying season.  The US housing market continues to be weak, however, and the months ahead are expected to see prices falling once again.  Housing prices have been cited as the key reason the US economy has struggled for more than two years following the official end of the recession.

European markets are set to close higher for the day, led by banks including BNP Paribas and Deutsch Bank, as expectations concerning more action on the part of policymakers in the Eurozone to stem the Greek debt crisis and help the banks in this region boosted investor confidence.  The FTSE and the DAX were both posting gains in late trading, with the DAX up over 4%.

A Real Fix To The European Debt Crisis, Or Too Little Too Late?

The question that is being put to investors is whether the market rally is sustainable, or is it a technically-driven, short-term bounce.  While the statements coming from European leaders have caused a rally in financials, whether the plan will put the region on solid ground, and put an end to the European debt crisis remains to be seen.


One of Europe’s barometers of investor anxiety, the VDAX-New volatility, fell 5.2%, with the Euro STOXX volatility index falling by 5.4%, signaling a decline in risk-aversion, and an increase in appetites for traditionally riskier assets such as commodities and equities.

With the political response to the Eurozone crisis continuing to unfold, analysts warn of the potential for further decline in equities markets.  The September US consumer sentiment report is also being closely monitored by investors.  The Consumer Confidence Index was expected to rise from 44 to 46, although early reports Tuesday have stated that the index is up only slightly at 45.4.

Possible European Debt Crisis Solution Spurs Appetite For Risk In Currency Market
Consumer spending accounts for roughly 70% of US economic activity, and this report signals that Americans continue to be concerned about low wages and stubbornly high unemployment.

The hopes that there could be a solution to the European debt crisis on the horizon gave investors in the currency market an increased appetite for risk, as the US dollar fell slightly, and the British pound hit a six-day high against the dollar and the yen.

In late afternoon trading on Monday, the dollar index (DXY) fell to 77.554 from 78.213, and the Euro saw a rise to $1.3625 versus $1.3497 in late Monday trading.  Analysts speculate that the Euro could bounce higher later in the week if the German government ratifies the previously agreed to modifications to the stabilization fund.

As the potential increase to the European Financial Stability Fund is being hailed as a positive step, the idea will certainly be debated by European leaders, and these debates could cause volatility for the Euro.  While analysts are calling for a positive Euro when the dust settles, it could prove to be a rock road in the meantime.

Next week’s possible cuts to interest rates by the European Central Bank, as well as Greece’s next installment of aid will almost certainly affect the single currency.

GBP/USD Forex Chart

Forex investors can look for buying opportunities in the GBP/USD, as the pair has been deemed oversold, with  analysts calling for a possible correction of up to 6%.  Analysts have rated the pair a “buy” with a recommended stop-loss of 152.44.

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