Financial Markets Drop as France and Germany Failed to Deliver Feasibile Solutions to Contain Crisis

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The focus was shifted to Europe yesterday. Disappointedly, both the macroeconomic data released in the Eurozone and the Franco-German summit raised market worries over the outlook in the region. Stocks and commodities (excepting for gold) lost ground. In the US, Fitch's affirmation of the Treasury's AAA rating supported the US dollar. Economic indicators, however, sent mixed signals on the country's developments.

Eurozone's GDP growth eased to +0.2% q/q in 2Q11 (consensus: +0.3%) from +0.8% in the first quarter. Growth in Germany and France, the 2 biggest economies in the 17 nation region, stalled. Also, the region's trade deficit unexpected soared to 1.6B euro in July from a revised 0.8B euro in June. Weaker-than-expected data were followed by a disappointing meeting between German Chancellor Merkel and French President Sarkozy. While the market had anticipated concrete and new resolutions for the sovereign crisis in the European periphery, the meeting placed the main focus on medium-term governance issues. The most-awaited Eurobonds and expansion of EFSF were not on the agenda. According to Sakorzy, Eurobonds can be 'imagined one day, but at the end of the European integration process, not at the beginning'.

The 2 leaders proposed to create a 'true European economic government' which will eventually lead to a common tax and fiscal policies within the Eurozone. Concerning fiscal issues, Germany and France will create a common corporate tax base and tax rate between the 2 countries from the start of 2013. Moreover, they will propose in September the imposition of a new financial transaction tax across all Eurozone members. While the details of the types of taxes were not provided, investors were obviously irritated by the financial transactions tax as the euro and equities plunged after the announcement.

Losses in financial markets were tamed after Fitch affirmed US' AAA credit rating and the 'stable' outlook. The agency said that 'the key pillars of US' exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base'. However, Fitch stated that it may lower the country's outlook to negative if the government fails to reduce deficits.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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