FTSE swings between gains and losses as debate rages ahead of Summit

The FTSE 100 swung between small gains and losses in choppy trading on Tuesday as traders hold fire from much activity and focus intently on speculation as to what could emerge from the EU Summit later this week.

The EU Summit, as they tend to do lately, is taking all of the headlines. European leaders are under intense pressure to create something plausible by the end of the Summit and most investors are waiting on the sidelines to see what, if anything emerges. Talk of Eurobonds appears to be somewhat in the distance currently, given Angela Merkel’s antipathy towards such a move without a significant loss of sovereignty over national budgets.

A prospective roadmap released by the European Council, European Commission, Eurogroup and European Central Bank towards greater banking union and supervision with the creation of a European treasury was, whilst containing many positive aspects, seen as overly optimistic by many investors.

It would be naïve to suggest that every European leader is waiting for the EU Summit before making their views known and so with much of the bargaining and positioning already taking place, investors are keen to hear every rumour or speculation out of the major players in the run up to the Summit to gauge what could emerge.

Whilst the roadmap released by European authorities today exudes several positive themes and ideas, one cannot help but feel that it would be fantasy to see all of its suggestions become agreed solutions at the end of the Summit this week. Indeed, by the European Commission’s own admission, it was not designed as a final blue print either. Yet therein lies the problem investors have, the eurozone crisis has dragged on and on and yet its key authorities are still talking in the spirit of blue prints as opposed to hard solutions agreed by all to help move the currency block in the right direction.

Will we see the creation of Eurobonds by the end of the summit? This appears unlikely at this stage but certainly what we could see, and indeed many are hoping for is a significant move towards laying the foundations for a common bond, such as greater fiscal union.

They key area of doubt, however, is regarding member states’ willingness to lose sovereignty over their national budgets. This remains something Angela Merkel wants to see agreed before she can contemplate shared debt liabilities. That said, wire reports late in trading today suggested Merkel said Europe will not have shared debt liabilities as long as she lives! So this remains a hugely contestable issue.

Too often have investors been let down by EU Summits over the past few years and so with this one taking place amidst a deepening crisis in Spain, not many investors are taking chances in the run up to the Summit.

Indeed, with Van Rompuy stating that this week’s Summit needs to give the thumbs up to forge detailed proposals by December, this could indeed be another Summit that simply kicks the can further down the road.

Defensives higher
It is no surprise that with the EU Summit to come this week, much of the buying we have seen in equities today is weighted in defensive asset sectors such as pharmaceuticals and tobacco firms. Financial stocks have proved a key drag on the UK Index, with shares of Royal Bank of Scotland proving to be the biggest faller, losing 4%.