Continental European politicians never fail to entertain us.  After cobbling together a not-quite-good-enough plan in July and then spending August on the beach, they have taken all of September and October before finally agreeing the outlines of a credible plan to allow Greece to default whilst containing the fall-out amongst Euro-zone banks and ensuring the Euro does not fall apart.  Given the 17+ countries involved, each with their own national politicians and domestic press, following the unfolding story has been simple as pieces of the story kept on leaking across the Continent (leaked by ”officials who are involved in the talks but wish to remain anonymous because the talks are supposed to be secret”).

So we now have another solemn promise from the Euro-zone to lend Greece €130 bln (up from €109 bln in July) and to allow Greece not to pay back €100 bln to private creditors (mostly Euro-zone banks).  At the same time the European Banking Authority, which 3 months ago was happy for banks to get by with Core Tier 1 capital of 5% under a stress test which assumed that Greece would not default, has now decided that it wants banks to have Core Tier 1 capital of 9% after they have marked all their “risk-free” sovereign debt to market prices (and could they please raise the required €106 bln of extra capital by end-June 2012).

Stockmarkets have rallied sharply off their secondary lows of 4 Oct 2011 and have now broken above the lower highs of 31 Aug in celebration of Europe not falling apart.  It is becoming increasingly clear that the sharp slowdown (growth scare) in US GDP seen in the first half of 2011 was just a mid-cycle growth slowdown and not the precursor to a double-dip recession (US Q3 GDP growth of 2.5% was announced yesterday which was a continued acceleration from Q1 growth of 0.4% and Q2 growth of 1.3%).  In theory this now leaves stockmarkets clear to rally on upward through their 2011 highs in anticipation of a prolonged period of (unspectacular) GDP growth extending the current economic recovery.

However beware of the devil-in-the-detail of the latest grand European plan (the 15-page announcement from the EU contains a complete lack of detail).  There may be further announcements at the 3rd/4th Nov G20 meeting in Cannes regarding a bigger IMF and China & Japan investing alongside the EFSF in Euro-zone peripheral sovereign debt.  However Angela Merkel publicly stated to the German parliament this week that “we have achieved some things but a more important step will be taken in Cannes”.  Given that her wish-list includes a Tobin tax on global financial transactions and action to tackle Too-Big-To-Fail banks it will pay the sensible long-term investor not to get too carried away and to top-slice/bank some profits ahead of the Cannes meeting next week.

A new trading range of 1,075 to 1,370 has now been established on the S&P 500 index.  Banking some profits now that we are in the upper half of that range (ahead of possible disappointment setting in following the Cannes G20 meeting) will leave investors well placed to take action at either end of the new trading range, whichever end happens to be tested first.