- 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.

- A Default could trigger a bigger crisis

I am of the opinion that a Greek default would easily spread across Europe with a bigger crisis of confidence that will be very difficult to contain. Such a crisis could possibly lead to serious consequences for the single currency.

Such a default would also impact both the ECB and other European banks with several banks failures that will force Governments to nationalize them. It would also intensify the crisis in the defaulting country making any hope for a recovery even more arduous.