Insight: Trading EU summits: Hope to despair and back again

Wed Dec 14, 2011 8:15pm EST
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By Steven C. Johnson

NEW YORK (Reuters) - Buy the rumor, sell the EU summit.

Eight times this year, European Union leaders have met to tackle their deepening sovereign debt crisis, raising hopes in financial markets that a solution could be close.

All eight times, the meetings have ended without a plan of action comprehensive enough to give more than a few days comfort to investors, often turning initial gains in stocks, the euro and European government bonds into declines within days.

"I guess that's why they call them summits. You sort of go up on one side and come down the other," said Gary Baker, European equity strategist at Bank of America-Merrill Lynch.

Investors' lack of confidence in European leaders has become so ingrained that the time it takes for traders to begin dumping euro zone assets after each summit has grown shorter and shorter.

Strategists at Germany's Commerzbank said it took 49 days from the first Greek bailout in 2010 for the cost of buying insurance against a Greek default to hit new highs.

When Ireland was bailed out later that year, it took 30 days, the bank said in a research note this week.

By the time Greece received a second bailout in April 2011, Greek credit default swap prices hit highs in just 14 days. Investors then moved quickly on to Italy. It took just 12 days for insurance against an Italian default to peak.   Continued...