Looking Toward the EU Summit - Analyst Blog

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Stocks will remain focused on developments out of Europe as a key summit meeting of the European Union ( EU ) gets underway today to consider the future of the union. The European Central Bank (ECB) also came through with the expected rate cut this morning, but the markets are looking for looking for far more leadership from the ECB than it has been willing to provide in order to stabilize the European government bond markets. The expectation is that following a favorable conclusion of the EU summit, the ECB will have the requisite mandate to start playing an anchoring role.

The summit meeting of the 27 members of the EU is being billed as a 'make or break session' for the union, as it will consider the Franco-German proposal to move the union towards greater fiscal integration. The EU is a two-track group, with 17 of its members tied to each other through a common currency and monetary union, with the remaining 10 retaining their legacy currencies.

It is this 17-member Euro-zone within the broader EU that has been in the eye of the storm over the last two years due to debt issues among its members. It is unlikely that the Franco-German proposal will get adopted by the broader EU group, but the Euro-zone members may not have many options except to go that way.

Endorsement by the summit to move in the direction of greater fiscal integration for the Euro-zone will not be the end of that issue. The required treaty changes will need to be ratified by the legislatures of individual members countries. And that will be a time consuming -- not to mention politically uncertain -- process.

It will not be easy for Euro-zone politicians to 'sell' the treaty changes to their electorates given how tough the economic environment is expected to get in the coming quarters. Given what has happened to leaders in Greece, Italy and Spain, the ratification process will likely be quite unsettling for the markets.

But the expectation is that an endorsement from the Euro-zone members in the Friday summit of the Franco-German proposal would be a demonstration of their commitment to the union. And this commitment will give the ECB the much-needed cover to start playing a more activist role in the government bond markets of the member countries.

Mario Draghi, the ECB head, indicated his willingness to go this route in a recent testimony should the Euro-zone leaders come out with a framework for fiscal unity. We saw some evidence of this recent days as Italian bond yields have started coming down following details released of the Franco-German proposal. We will have to wait and see what comes out of Friday's summit meeting, but expectations are quite high.

On the home front, we have an impressive Initial Jobless Claims report this morning, with claims dropping to the lowest level since February this year. Initial Jobless Claims dropped to 381K, better than the expected drop to 395K, from last week's 404K. Initial claims had moved back up above the 400K level last week after staying below that level for a number weeks. It is reassuring to see that this key series has again started moving in the right direction, which is in line with other labor market readings.

In corporate news, McDonald's ( MCD ) came out with better-than-expected same-store sales numbers for November. Costco ( COST ) came modestly short of expectations due to high expenses.

COSTCO WHOLE CP ( COST ): Free Stock Analysis Report

MCDONALDS CORP ( MCD ): Free Stock Analysis Report

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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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