Is the EU Bailout Package Enough...?

Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.

But the question is,

• Is this something to get overexcited and start buying stocks ?
• Is this bailout package enough to give a stability to the European financial system?

Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.

The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that

• The yield on the Greece's and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
• The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement

Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.

Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.

Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened.