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All Eyes On European Situation

Europe will once again decide in how Wall Street will change this week, culminating in a European summit expected to make a definitive solution to the debt crisis that has shaken the euro area for nearly two years.

Last week, the U.S. stock market recorded its best performance since March 2009 in favor of such hopes for this crisis finally resolved.

If all goes according to plan concocted by Paris and Berlin, the EU has indeed made a big step towards a union budget Friday night, with agreement on a change of European treaties including greater fiscal discipline of the 17 countries the euro area.

Previously, according to this ideal scenario, the European Central Bank (ECB) will be on Thursday once again lowered its interest rates to avoid a relapse into recession and to give some air to banks experiencing difficulties in refinance.

But this happy outcome to the crisis is far from certain as Berlin and Paris still differ on the proper role of the ECB and how to control the budgets of the countries in the euro area.

“Next week everyone will be focused on the summit on Friday. But do not forget that we are already at the highest level since the fifteenth (early) the crisis in the euro area. Each time, stakeholders enthusiastic market before maturity and after … it’s the disappointment, “said Ken Polcari, managing director at ICAP Equities.

Wall Street has evolved sawtooth since the beginning of the fall at the discretion of the evolution of the crisis in Europe.

While the S & P 500 benchmark index fund managers, rebounded by 7.4% last week, volatility remains high due to the sensitivity of investors to any bad news from Europe.

But the predominant feeling is that European leaders have taken the measure of the crisis.

Paris Stock Market Suffers Again

The Paris Stock Market could fall to its level of November 2010 Monday after hitting the lows of the year, the results of stress tests of banks have not dispelled the fears of contagion from the crisis of sovereign debt in euro area.

Near close, the CAC 40 index fell by 1.73% to 3662.40 points, after falling to 3648.76 points, its lowest level this year, weighed down by banking stocks, which represent nearly 13% of benchmark index of the Paris, and the lack of credibility of resistance testing (“stress tests”) awarded by the European financial institutions.

“The market reacts to the lack of credibility of stress tests, which have not sufficiently taken into account the potential impact of sovereign risk, although their results were better than expected in appearance,” said Stanislas de Baillencourt manager at Sycamore Asset Management.

“This also occurs in a context of uncertainty in the United States on the federal budget negotiations,” he adds.

Consequently, according to a graphical analysis, the CAC 40 should continue to decline especially since the index is oversold and that it has opened a new “gap continuation” – gap in transactions between sessions marking the continuation of a trend – after that of Monday.

Metals Increase Helping Chinese Markets

Precious metals are even better in a year in dollars per ounce, gold has increased by 30% and silver of about 100%. Recently, the Chinese stock index has returned despite the slowdown of economic indicators. Nothing paradoxical in this: in China and Hong Kong, monetary factors have much more weight on the market trend as economic fundamentals. In June, the purchasing managers index rose to 50.9 down from the previous month to 52.

If one is interested in monetary factors, it should be very careful. In late May, the broad money supply (M2) stood at 76,340 billion yuan, an increase of 15.1% over the previous year. During the same period, money supply M1 increased by 12.7%.

This increase in money supply has slowed somewhat in recent months, but it is still too high. The IMF forecasts a 9.6% increase China’s GDP in 2011 and 9.3% in 2012.

If one compares these figures to 6.4% of the price index (CPI) in June, monetary policy is still expansionary. For this reason, the People’s Bank of China (PBOC) raised its key interest rate on July 7 for the fifth time since October 2010, the rate loans and deposits were increased by 0.25 points percentage.

The major concern for Beijing is growing indebtedness of the areas which the government insists on stem. Regional bodies should be more tightly controlled. Outstanding thousands of funds held by local governments are estimated at between 1 600 to 2 000 billion. Loans denominated in renminbi and foreign currencies increased by 16.9% over the previous year. From December 2007 to May 2011, outstanding bank loans has doubled.

This already looks like a credit bubble. The banks could face a substantial impairment of loans to regional governments.

It is also true for the real estate market bubble which seems to be formed, especially in coastal areas. And now as the tap liquidity tends to close, most likely we enter a period of tension and strife.

Conclusion: for the investors in the financial markets, it could become very difficult to obtain in China, satisfactory performance in the near future.

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