Merkel and Sarkozy agree outline for EU Treaty change but key will be garnering support – Banks lead rally

<p>Financial stocks such as banks and insurers led a 0.3% rally in the FTSE 100 as investors eyed a potentially pivotal week for the future […]</p>

Financial stocks such as banks and insurers led a 0.3% rally in the FTSE 100 as investors eyed a potentially pivotal week for the future of the eurozone.

It’s been a positive start to an important week in the life of the eurozone, with Angela Merkel and Nicolas Sarkozy agreeing joint proposals to bring about greater fiscal union within the eurozone through multiple changes to the EU Treaty, which would include an automatic sanction for any breach of deficit rules and a golden rule against running deficits and for balancing budgets more consistently.

Merkozy agree but can they garner support?
Whilst the move to agree terms for a new EU Treaty between Merkel and Sarkozy, the power houses of the euro area, is an important step in the right direction, they need support for these changes amongst the other EU members. The fact that Merkel and Sarkozy have openly admitted they would settle for their recommended changes to be implemented by the 17 states which have adopted the single currency, as opposed to their preferred full 27 members of the EU, shows that the likely path for full ratification of today’s announced measures remains full of potholes.

Announcing treaty changes agreed between France and Germany is one thing, getting other member states to agree to these changes is another kettle of fish, particularly when member states have their own goals to achieve and the eurozone crisis has weakened several governments who may need to show a strong hand in Europe to recover weaker support at home.

The progression of Merkel and Sarkozy’s planned changes to the EU Treaty may well live or die this week by the ability of member states to compromise.

The last 24 hours, however, during which Merkel and Sarkozy agreed fresh EU Treaty changes and Italian PM Mario Monti announced fresh austerity measures, has helped to significantly cool both Italian and Spanish debt markets, giving investors fresh impetus to buy into stocks.

The Italian 10-year bond yield retraced back towards the 6% level whilst Spanish 10-year bond yields also moved closer to the 5% level.

However, with market prices continuing to react to each and every news or speculation out of the euro area, investors are showing signs of high sensitivity and this does put gains at risk of profit taking as we edge closer to the EU Summit.

There remains a degree of optimism too that once or ‘if’ European leaders agree changes to the EU Treaty, this may help to free the hands of the ECB to purchase bonds more aggressively and contain the crisis with fresh impetus, in a week where Europe’s Central Bank is also expected to announce another cut in interest rates.

Financials lead gains
The FTSE 350 banks and insurance sectors were the standout gainers in trading in London, with Lloyds Banking Group and Royal Bank of Scotland shares the top performing stocks on the FTSE 100, rallying over 5%. The gains for banking stocks today come off the back of a best weekly performance for banking stocks in 32 months.

Shares in RBS have gained over 30% in the last nine trading days alone, which is a huge increase in such a relatively short space of time as investor confidence has increased ahead of the EU Summit that European leaders will deliver on the changes required to contain the debt crisis.

Michael Page shares slump
Shares in recruiter Michael Page however slumped 5% on the day, having fallen well over 10% in earlier trade after the firm warned that its full year profits would be towards the bottom end of market consensus. The firm admitted that headwinds from the European financial crisis had impacted its earnings and this has triggered several brokers into downgrading their price targets on the company’s share price this morning. Michael Page shares hit its lowest point since late 2009 in reaction to the profit warning.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.