Investor fears of euro-zone catastrophe fading Sk

Investor fears of euro-zone catastrophe fading
Skeptics warn that danger could return with a vengeance
FRANKFURT (MarketWatch) — Despite nearly three years of dithering, infighting and backtracking by European leaders, some strategists now say the euro-zone debt crisis no longer poses the immediate danger that has kept investors on the lookout for the next market-sinking headline.

The crisis “used to be a wrecking ball hanging over the markets […] It has stopped swinging,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.

While Europe’s debt problems remain capable of “wreaking extreme havoc,” investors are coming around to the point of view that efforts by the European Central Bank and euro-zone governments pushed the crisis down the list of immediate investor concerns, he said.

Spanish and Italian bond yields have tumbled from crisis levels in the wake of ECB President Mario Draghi’s late-July pledge to do “whatever it takes” within the bank’s mandate to save the euro.

Draghi backed up the pledge with a bold but yet-to-be implemented plan to buy potentially unlimited amounts of short-dated, distressed government bonds from countries that tap the region’s rescue fund and agree to abide by strict conditions.

The yield on Spain’s 10-year government bond (ES:10YR_ESP) topped an eye-watering 7.5% before Draghi swung verbally into action in July. The yield now stands near a six-month low below 5.30%. The drop has been even more dramatic at the short end of the curve.

The euro (US:EURUSD) set a two-year low of $1.2143 in July but has since rebounded, changing hands Friday at $1.3025.

And while the completion Friday of a two-day European Union summit produced no major breakthroughs, optimists said a broad agreement to establish a framework for a single euro-zone banking supervisor by Jan. 1 indicated leaders remain on the same page despite haggling over details.

The lifting of the near-term threat from the euro crisis “leaves equity markets trading at very low valuations, with broad central bank support,” Wilkinson said.

In the United States, the Federal Reserve has embarked on a third round of quantitative easing, while the Bank of Japan and the Bank of England are continuing extraordinary stimulus measures of their own. The central-bank efforts are seen lifting global risk appetite, helping buoy equities and other so-called risk-oriented assets.

Others, however, question how long the respite can last.

Easing worries about Europe are strictly a function of relatively low yields in Spain and Italy at the moment, said Ed Lalanne, strategist at New York-based Macro Risk Advisors. He acknowledged a growing perception among investors that the near-term risk from Europe has diminished. “But I would disagree with any assertion that [Europe] is not the biggest risk” to global markets, he said.
http://articles.marketwatch.com/2012-10-19/ma...-euro-zone