The very much anticipating weekend is what on the card now; what the outcome of the EU Summit that will start today and end on Sunday.
Very much has been said about the EU crisis and global leaders knew that if nothing still to be done, global economy will slip into recession again.
Just last week, global stock markets rallied at least 8% from their 52-week low in hope for a solution to end the EU crisis this coming Sunday but was shot down by Germany citing do not expect a dream solution or simply a one-fix-all solution on 23rd Oct 2011 and since then global stock markets pull back at least 3%.
There are 3 possible scenarios to the stock markets next week with the outcome of the EU Summit.
1. Still nothing come out of the EU Summit and yet again EU leaders deliver another sweet talking or they still can't resolve the differences among them to act. This nevertheless will cause another plunge in the stock markets for the fear of global economies will be back to recession.
2. An unexpected one-fix-all solution emerges and everything get finally resolve and stock markets will see sharp rally like the case of March 2009.
3. Something will be announced with detail this coming Sunday, another step towards resolving the EU crisis and this measure will really depend whether meet global expectation. Should it meets global expectation, global stock markets will rebound from past days of retreat. Should it fails to meet global expectation, the immediate response from global stock markets will be a knee-jerk reaction before stabilizing occur. Knee-jerk reaction could cause stock markets to drop probably another 3%-5% on average.
Scenarios 1 and 2 have a high chance of no happening as EU leaders knew the seriousness of the meeting and the crisis and investors now also knew that EU leaders will not have a one-fix-all solution. Most likely scenario will be 3 to be play out.
What announcement can be expected from the EU Summit ?
Firstly, we might see detail of how much haircut private investors will be getting from Greece default. Greece's debt should lead to Greece default and EU recapitalize the banking systems.
Secondly, the very much talk about enlarging the EFSF ( EU bailout rescue funds ) should provide detail on how much that will be. Just days ago, an news from Guardians citing a possibility to enlarge to 2 trillion but EU denied that. Today another report citing a 1.3 trillion instead to comprise between Germany and France. Enlarging the EFSF is a must ( given that all 17 EU nations have already gone through the voting process to approve it ) as EU apart from Greece still have Italy, Spain, Portugal and Ireland to worry about on the debt issue.
The above 2 should be the minimum expectation of what should be addressed from the EU Summit as this should bring some confidence back to the investors. Any more would be considered bonus step to resolve the EU debt issue.
Investors must have a high risk appetite now to buy ahead of the EU Summit and be mentally prepare for a knee-jerk reaction should the outcome fall short of expectation. For risk averse investors, wait for the outcome of the EU Summit.
Lastly some food for thoughts.
"To have expectation is good but over expectation will kill. To be safe always under expect"
