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by Peter Switzer

Day one since Europe came to its senses with its 750 billion euro bailout of its problem child debtors and the reaction has been positive. Thank God because if the market rejected the credibility of this rescue we really would have had a Lehman Brothers Mk II market slump re-run on our hands!

Happily Wall Street rallied strongly but commentators noted that the updraft lost some drive as the trading day extended on the New York Stock Exchange.

But, by the end of the day the buyers had second thoughts and the Dow ended up nearly four per cent. For those who love big stats, the Dow shot up 454 points in the first 15 minutes and finished up 404.71 points and that’s a good hold.

Frankly it would have made total sense for a bit of a market pullback after a big rally when the Dow opened so high. So the finish was encouraging.

Wolf pack

But we’re not out of the woods yet as short-sellers and hedge funds know markets are jumpy right now. The fact is that Europe has rescued itself with this trillion-dollar pledge to defend it member nations against the so-called ‘Wolf pack’, as one EU leader described the group’s market enemies — hedge funds and short-sellers.

Tests ahead

Without doubt there will be tests for Europe and its stomach to support its recalcitrant debtor members ahead. What the rescue package has done is give the likes of Greece the breathing room to put an austerity program in place to stabilise their economy.

The result of the bailout was that 10-year government bond rates for these troubled economies fell to more affordable levels and this helps these governments straight away as they can borrow money at cheaper interest rates.

Some critics were concerned that the euro didn’t kick over the trading day but that makes sense to me. A currency is the best canary in the coalmine and while Europe has found money to fix the current debt predicament, there will be a payback time, which will lead to slower economic growth in Europe. That’s why the euro remains friendless while currencies like ours and Canada’s are seen as safer havens as mining-based economies have plenty of economic growth ahead.

Cautious bull

Last night on my program — SWITZER on the Sky News Business Channel — Martin Lakos of Macquarie Bank says his market expert buddies still see the S&P/ASX 200 making 5500 this year. Clearly, they still believe in the global recovery, the US economic comeback and the relative strength of the Aussie economy going forward.

I remain in the bull’s camp, albeit more cautiously than six weeks ago, when the Europeans should have set up its current rescue plan. They have shown that they’re not reliable managers of policy and their own members.

Better late than never

But before I go, I have to share with you the views of Art Cashin, the director of floor operations at UBS Financial Services on Wall Street.

Cashin is sceptical about the bailout.

"Is Greece still going to get its allowance, even though it won't clean up its room?" he asked, on CNBC. I love the Yank’s simplistic analysis!

Ultimately, how the governments respond to the austerity plan that goes with the rescue will determine the success of this belated assistance measure.

I guess the old cliché still applies — better late than never!

For advice you can trust, contact Switzer Financial Services.

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Published on: Tuesday, May 11, 2010