Eurozone summit: A real feeling of deja vu

27th October 2011

As I start this article the FTSE 100 index is soon to open but indications are that it may open around 150 points higher at around 5700. The Euro exchange rate has pushed higher too on the deal and is at 1.40 versus the US dollar and has nudged sterling into the low 1.14s.

Let us take a look at May 10th 2010 after the "shock and awe" summit

Initial Market Action

"The Euro has rallied against the US $. As I type this at nearly midnight UK time the Euro has strengthened to 1.2881 although it is not holding the highs it reached when the news of this announcement began to leak. Stock markets are rallying quite strongly initially with the US S& P future gaining some 2% on its Friday night close and Dow Jones futures rallying some 165 points."

Comment

As I have pointed out above there is a real feeling of deja vu here is there not. We have an equity market surge and a strengthening Euro exchange rate. I also find it intriguing to look at the Euro exchange rate as then it was just under 1.29 and now it is 1.40 versus the US dollar. So the move in the exchange rate has been unfavourable for the peripheral Euro zone countries that are in trouble.

Just to reinforce that point one of the main problems for Greece, Ireland, Portugal, Italy and Spain is that they lack price-competitiveness compared with the economic powerhouse that is Germany. However a rising exchange rate means that they are now in a worse position compared too much of the world than they were in the spring of 2010. Ironically the anti-inflationary effect of rising against the US dollar which would be very welcome in the UK is less welcome here as many of these countries have strong deflationary and disinflationary pressures at this time. For example on the standardised European consumer inflation measure (HICP) Greek inflation was 5.3% in May 2010 and 5.7% a year ago and is 2.9% and falling as of this September.

What is in the deal?

Read more…

More from Mindful Money:

Eurozone Debt Crisis: LIVE

Creativity and financial crisis: Will this provide the answers?

The Eurozone summit: What are the issues?

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