October 26, 2011 / 11:23 AM / in 6 years

Investors on guard for euro zone debt decision

<p>A man talks on the phone in front of WIG20 index screen at the Warsaw Stock Exchange September 28, 2011. P REUTERS/Kacper Pempel</p>

LONDON (Reuters) - Financial markets were gripped on Wednesday by a European Union summit pledged to tackle the euro zone’s debt crisis but struggling to come up with firm commitments.

Wall Street looked set to open higher, helping lift European stock out of a tight trading range. The euro remained above the relatively firm $1.39 level.

Market expectations that EU leaders will come up with a comprehensive solution to the debt problem have dipped as political wrangling ahead of the meeting has continued.

Investment bank Citi said it was a “numbers game, without the numbers.” Bill Blain at Newedge said in a note there was “a scary calm across markets.”

While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there is little clarity on two other critical parts of the package.

Those are how to scale up the region’s rescue fund and how much of a loss private bondholders will take on Greek debt.

“They can’t quite pull the rabbit out of the hat yet, though they will probably get something better over time,” said Lothar Mentel, chief investment officer at Octopus Investments.

He suggested markets would react badly to any failure to come up with a plan, but there was no early sign of that.

World stocks as measured by MSCI .MIWD00000PUS were flat while the pan-European FTSEurofirst .FTEU3 gained around 0.2 percent.

Bank of America-Merrill Lynch said there was scope for a tactical stock rally even if the EU summit disappoints because investors are holding a lot of cash and are bearishly positioned.

U.S. stocks are enjoying a relatively positive earnings season, with close to three-quarters of those reporting so far beating expectations.

EURO STEADY

The euro inched higher versus the dollar, with analysts saying that the fact it remained within sight of a six-week high of $1.3959 hit in the previous session showed many investors were still hoping for a positive summit outcome.

The dollar reversed earlier losses to sit flat against a basket of major currencies .DXY. It has lost nearly 5 percent against the basket since a high at the beginning of October.

Core German debt was a bit stronger, pending news from the EU summit.

“What Europe needs is a clear, quick-to-implement and easy-to-fund solution ... (T)here is a clear risk that we get a vague plan with no specific timetable and specific numbers,” Lloyds TSB said in a note.

Additional reporting by Brian Gorman, Dominic Lau and Kirsten Donovan; Editing by Catherine Evans

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