Why this week could be the decider

Founder and Publisher of the Switzer Report
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With the local stock market registering a 7.6% rise last week, the key questions have to be: Can we put two good weeks together? And could we be laying down the foundations to see a bull market be constructed for next year?

This week could be pivotal in bringing about either a happy or unhappy ending to 2011, which will have a big bearing on what 2012 ends up looking like.

Last week ended with great US economic data culminating in a fall of the jobless rate from 9% to 8.6%. Sure, the participation rate fell, but around 120,000 jobs were created — this was a very positive sign and, provided Europe can show some promise this week, we could easily rally into year’s end.

On Friday, Bloomberg reported that the European Central Bank (ECB) was in talks with the International Monetary Fund (IMF) about lending the Fund some 200 billion euros to help the embattled debtor countries. The IMF also asked Brazil for help to assist Europe and the government indicated it was positive on the idea.

These are all good signs.

Further, Wall Street put on 7% plus and the VIX, or fear index, fell below 30 to 27.52 – nice omens that confidence levels on the very sensitive stock markets are on the rise.

The Dow is now up 3.82% for the year — the second best weekly showing ever — while we are down 9.8%! We need some really good news if we want to finish up in 2011. Of course, the calendar year is only a psychological thing because we pay tax on a financial year basis and over the past two fiscal years we have finished in the black.

But the way forward rests on Europe and this week could prove vital.

The New York Times says the summit at the end of the week could “yield a breakthrough”, and it will rest on what the 17 countries of the eurozone decide about fiscal discipline. If it impresses, then the ECB and the IMF could provide some more ‘shock and awe’, like the one we saw from the collective of the world’s biggest central banks.

There will be an all-star cast putting their heads together ahead of the meeting, including German Chancellor Angela Merkel, French President Nicolas Sarkozy, ECB boss Mario Draghi and US Treasury Secretary Timothy Geithner. Then on Monday it will be Merkel and Sarkozy in Paris and this could be getting close to their ‘last tango in Paris’ — let’s hope they remain truly in step!

This week, the pair hope to turn basic commitment to fiscal responsibility into actual binding agreements from the member countries. This will give confidence to the ECB, the IMF and even G20 countries that could be asked to dig deep to save the debtor countries of the EU.

Right now, the European Financial Stability Facility has about 440 billion euros and the IMF has 270 billion euros, but this won’t cover bailouts for Italy and Spain. That’s why we need to see consensus from the eurozone and then promises of support from the ECB, the IMF and the G20 sooner rather than later.

“We are now entering the critical period,” the EU’s financial chief, Olli Rehn, said last Wednesday, and that was when the central banks moved in unison to give Europe liquidity.

Rehn is absolutely on the money, but let’s hope the 17 eurozone members and their voting populations are happy to ride the same horse.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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