Eyes On The EU Summit, Unemployment And Retail Sales In Focus

Last week, optimism dominated the market as European finance ministers met to outline the guidelines for European leaders to create and complete a final and decisive plan to tackle the debt crisis. In addition, the euro-area manufacturing and services sector improved more than expected and finally the Federal Reserve pledged to hold rates as they are until late 2014 in order to support growth, which supported the sentiment to remain positive through the week, adding more strength to the European common currency.

This week eyes will be focused on the European summit as European leaders will start their meeting on Monday to discuss and create a plan to tackle the debt crisis and prevent the contagion from spreading further, where this meeting is very critical and all markets will be tracking the measures and plans set by leaders to put an end to the two-year debt crisis.

This summit is very important as markets are waiting what European leaders will bring this time to stop the contagion of the debt crisis, where we can see confidence improved this month as the European indebted bonds witnessed lower yields and stronger demand, while European shares were able to record gains since the start of this year, in the time the common currency advanced against the low yielding U.S. dollar.

Last week, the finance ministers met for two days and discussed the terms of establishing the European Stability Mechanism (ESM), which is expected to be presented in July, where finance chiefs set the guidelines for leaders to finalize the creation of the permanent facility during the summit this week.

In addition to the creation of the European permanent rescue fund European leaders are to finalize the fiscal integration conditions are rules this summit, where eyes will be focused on the new agreement between the European Union nations and how effective the plan will be as leaders will seek for stricter budget rules in order to force European nations to reduce the huge amount of debt they handle in a step to fight the escalating debt crisis, which triggered the global slowdown.

Leaders will also negotiate the current economic situation in Greece; especially after the Greek Government approached to an agreement with the private sector bondholders, where markets are still tracking any developments with creditors who proposed finally to voluntary incur 50% losses on their Greek debt holdings for 3.75% coupon rate on the bonds to be issued in exchange for the existing Greek debt, noting that markets are waiting the deal to be completed as Greece has to repay 14.5 billion euros of maturing bonds in March.

The European summit will highlight the beginning of our week; however, during the rest of the week eyes will be concentrated on key data to be released from the euro-area region that may confirm the improvement in confidence and in the economic situation in general.

This week eyes will be focused mainly on the CPI annual flash estimate, purchasing managers’ final reading for manufacturing and services and finally the concentration will be on the unemployment figures from the euro-area nations in addition to the jobs report from the world’s largest economy.

The euro zone CPI flash estimate is expected to show that inflation eased further in the month of January to 2.6% from 2.8%, leaving more space for the European Central Bank to move again and provide more easing to save the euro-area nations; however, we don’t expect the bank to cut rates this meeting as the bank still attempts to balance between maintaining prices stability and boosting growth.

The performance of the manufacturing and services sectors are expected unchanged as the euro-area nations release the PMI final manufacturing and services indexes; however, eyes will be on the United Kingdom’s manufacturing and services sectors, especially after the economy contracted more than expected in the fourth quarter and ahead of the February BoE decision that might see the expansion of the APF again.

The unemployment rate is also expected to linger at 10.3% in the euro area region, while in Germany the rate is expected to remain unchanged at 6.8% in the month of December; however, the main focus at the end of the week will be on the U.S. jobs report, with expectations the public sector could have added 148 thousands new jobs in January, while the unemployment rate is expected to remain steady at 8.5%.

Finally, we expect a very volatile and violent week; however, the sentiment is expected to remain positive if European leaders were able to finalize the plan set to heal the debt crisis; however, key data awaited during the rest of the week are expected to determine whether the market is to continue the bullishness or it will reverse and cut the gains recorded in January.

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