Tentative stock gains but eyes remain focused on Europe

European stock markets saw tentative gains on Wednesday morning after gains in trading in Asia this morning, yet with many eyes remaining on Europe, gains could be kept on a leash.

The FTSE 100 opened to gains of 24pts to trade at 5471 within the first 30 minutes of trading with marginally stronger gains seen in the DAX and CAC, with both the German and French stock indices gaining 0.6%.

Focus on Merkel and Hollande meeting
The focus for many investors however remains on the situation in Europe ahead of a two day EU Summit in Brussels that starts tomorrow. Angela Merkel – fresh from aggressive proclamations that Eurobonds would not happen in her lifetime – meets Francois Hollande, the French President, in Paris today in a final series of talks ahead of the start of tomorrow’s summit.

There however does appear to be deep divide at the heart of the Summit already even though it has not even started yet. Merkel’s antipathy towards Eurobonds comes at a time when the majority of other European leaders are calling for a solid road map to such a common bond. Whilst it is understandable that Eurobonds would not be credible without deeper fiscal integration amongst euro members, it appears Eurobonds will remain a fantasy until EU countries are willing to lose a degree of fiscal sovereignty and ultimate budgetary approval to a new EU created fiscal body. The problem here is that it remains highly uncertain whether this is something key members are willing to dissolve given support from their own voter’s remains highly volatile.

Rajoy applies pressure on bond buying
The Spanish PM Mariano Rajoy said today that his country cannot continue to fund itself at current yields for a long time, a fresh line aimed to put pressure on Merkel and ECB President Draghi ahead of the summit for greater intervention into the bond markets by either the ECB or the eurozone’s bailout funds.

Glencore and Xstrata merger under serious threat
The Glencore – Xstrata merger deal took a significant blow last night after Qatar Holdings rebuffed Glencore’s offer of 2.8 shares for every one of Xstrata’s calling for a higher offer of 3.25 shares. The move was a real surprise and increases the fragility of the deal that was already under heavy pressure from the significant executive pay retention fees.

For the merger to fail, 75% of existing Xstrata shareholders must vote YES but given the fact that Glencore already own 34% and cannot vote, this leaves just 16.5% to vote NO and the merger fails under existing terms. With Qatar Holdings owning close to 11% of shares, the deal is now under significant threat of failure, unless Glencore can resolve is executive retention pay issues and considers a higher offer. Glencore shares fell 2% whilst Xstrata shares fell 0.9% in reaction in London trading.

Chinese stimulus debate continues
A story in the Chinese Securities Journal that the Chinese government could be planning fresh growth boosting policies to help stimulate the Chinese economy from slowing growth helped saw a mixed reaction in mining stocks. Whilst the recent change in monetary policy from China to dovish following a rate cut, many are seeing the next move potentially being another cut in the bank reserve ratio requirement. Yet still, the FTSE 350 mining sector, having initially opened higher, lost ground in trading, losing 0.8%.