Euro deal may put floor on sell-off

EUROZONE leaders’ agreement to pursue stricter budget rules to preserve the euro may be just enough to put a floor on a sell-off in risk assets into year-end, if not to turn around investor sentiment completely.

Investors, however, are about to enter a period of Christmas-thinned liquidity, which can lead to sudden and explosive moves. Assumptions about calm or calmer markets need to be tempered.

All 17 members of the eurozone, and other EU countries aspiring to membership, agreed on Friday to forge ahead with stricter budget rules as part of efforts to tackle the debt crisis and tighten fiscal integration.

Britain said it could not accept proposed amendments to the EU treaty, so the eurozone will negotiate a separate treaty alongside the EU treaty with a tougher deficit and debt regime.

Despite some disappointment, world stocks have only lost around 1.6% in the past week — nothing to be alarmed about given the index rallied more than 8% in the previous week.

Stocks fell sharply on Thursday after European Central Bank president Mario Draghi poured cold water on market hopes that the bank could ramp up bond buying, seen as key to stabilising rising borrowing costs of highly indebted eurozone members.

But by Friday afternoon, European stocks were making cautious gains, with the eurozone deal seen as at least a step towards ending the debt crisis.

“It’s a compromise solution but there isn’t a silver bullet. If you look at elements put in place there are some positives. We’re seeing the path towards the solution,” said Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management.

“Risk assets have been extremely correlated because of systemic risks. But for medium- to long-term investors it’s an interesting entry point. There’s value there. It’s not a picture of complete doom and gloom.”

HSBC Asset Management likes commodity and emerging market stocks as well as corporate bonds, while it views safe-haven government bonds as too expensive.