- European Rally to continue

I am convinced that the great start of the year (with European equities having the best start of the year since 1998) will continue in 2012. This because much of the banking crisis has been solved by the ECB bazooka where European banks are taking advantage of the carry trade with Sovereign European bonds and could increase their usage of the ECB facility to 1 trillion Euro in February.

There is a strong connection between the European banking crisis and Sovereign debt crisis and, provided that Europe carries on with their budget austerity measures and that Greece does not default, the rally could well continue throughout 2012.

- Political Uncertainty is still the main issue

This positivity about Europe and European equities depends on the resolution by mid February of the Greek problem. The political slow motion decision making is once again impacting the markets: doubts about a possible default of Greece have added pressure to Portugal and other countries. The political situation remains the biggest unknown. But to save the Euro a solution for peripheral countries has to be reached as soon as possible.
This solution, to be credible and sustainable, will have to include an higher degree of oversight like an EU commissioner as part of a solid fiscal pact.

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- Mass Downgrades: Is Europe Doing something wrong ?

It was expected and, to some degree, it was already priced in by the markets. But the mass S&P downgrades of Friday are certainly ill-timed. Just this week we had a considerable improvements in both Spanish and Italian auctions. This improvement could now be jeopardized by a negative outlook that could be the prelude to further downgrades.

S&P criticized the policy response. I would say that many European countries are already in the process of enacting important reforms and need more time to address the problem. The downgrades were expected since the S&P downgrade of the U.S.
It was completely inconsistent to have U.S. with a AA+ rating and some European countries like France and Austria with a AAA rating so, in a way, the S&P downgrade more backward looking. While in the short term this downgrade might impact the markets
I do not see this a game changer in the European reform process.

- Greece has to avoid default

Greece has to do whatever it takes to negotiate a restructuring of its debt without defaulting. It is rumored that a number of creditors might would want a default to be able to claim compensation from the CDS but this would have very negative consequences for the European markets and for Greece.

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No Global Recession, the end of the European Crisis in 2012
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Markets in 2012 started with a rally and this is not surprising as equities, especially European ones, are priced for a global recession or a meltdown of the euro and both events will not occur in 2012.

Positive economic data from India, China and the U.S. confirm that we are not heading for a global recession.
While the European situation remains fragile many companies are already pricing in a European recession and are therefore attractive.

The U.S. Economy is very likely to rebound in 2012 making U.S. equities attractive too.

European markets are largely oversold and still present a good buying opportunity for 2012.

While a final resolution of the European Crisis might not materialize immediately many of the austerity measures, like in the case of Italy, have already been enacted and this will help in restoring investors confidence. With the European bank liquidity issue being now solved by the ECB measures I expect Italian and Spanish bond yields to normalize soon. Some Europeans markets, like the DAX, experienced step declines in 2011 and are likely to recover in 2012.

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Commodities rebound in ...

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