As a follow-up to the EU summit French president Nicolas Sarkozy held a telephone conversation with the Chinese president Hu Jintao on Thursday, discussing the possibility of Chinese participation in the combat against the European debt crisis. Hu Jintao expressed his hope that the agreement reached during the Wednesday meeting will stimulate recovery in the euro area and communicated China's willingness to cooperate closely with G20 in order to strengthen global economy. Klaus Regling, the chief of the EFSF, will travel to Beijing tomorrow to win over Asian investors' confidence. 

The markets rallied on Thursday in the aftermath of the debt deal reached by EU leaders. The German DAX Index advanced 4%, the French CAC 40 increased 4.29% and Eurostoxx 50 rose 4.14%. Markets in Italy and Spain are showing substantial rallies as well. 

The Euro also extended gains, boosted by the EU debt agreement news. EUR/USD grew 150 pips to 1.4038. The EUR/GBP bounced reaching one-week highs at 0.8768 while the EUR/JPY rose to 1.0655.

Deal struck over Greek haircuts

The last missing piece, one that was necessary to complete the puzzle and bring to the table a credible plan to deal with the European debt crisis, is completed. After taking hostage up to 500 journalists until 4am in Brussels, European leaders reached an agreement with bankers by which private bond holders of Greek debt will commit to a 50% write-down. Rumours had been circulating that the total sum may fall in the range of 50-60%.

Earlier on the day, the EU summit, an extension of the first held last Sunday, boosted enough confidence among investors to prolongue their patience some extra hours. As such, the Euro held firm around 1.3900 vs the Dollar. After a tranquil passage in early Asia, the excuse that tarders had been waiting for to continue the short-covering squeeze became a reality, and the Greek haircut deal came in tune with the desire of the market to keep the Euro afloat, thus initiating a ferocious attack to take out 1.4000, something still in the works, although getting closer to also become a reality, somehow difficult to believe just weeks ago, when the Euro short play was apparently the trade of the century amid so much fear and confussion in Europe.

To recap, none of today's announcements on the official release were ground-breaking news, instead was simply a reassurance or a confirmation that most of the actions to be implemented were very much in line with info leaked in previous days. The following quote, Via Peter Tchir of TF Market Advisors, defines pretty well what may go through traders mind at this point: "Europe is playing havoc with this old trading strategy. By only having rumors and never having news they keep the markets in permanent buy the rumor mode". We are just simply getting used to politicians doing the can-kicking, while traders/trading programs remain busy doing the bid-clicking.

To begin with, we now know the amount of capital banks will be required to raise. According to the official statement from head of states: “There is broad agreement on requiring a significantly higher capital ratio of 9 % of the highest quality capital and after accounting for market valuation of sovereign debt exposures. This quantitative capital target will have to be attained by 30 June 2012", that means, according to Jamie Coleman, from Forexlive, "banks will have to raise EUR 108 bln, the number that has been floating around all week. The fact that soggy ham sandwiches will count as capital is secondary…"

The second issue was the EFSF boost. We now know leaders are planning to leverage the EFSF by “several fold” according to the Euro zone draft. Commenting on this expected outcome, Mr. Coleman observed: “We’ve been waiting for the total buying power of the EFSF. They claim it will be levered to EUR 1 trln, an amount we’ve been guided to expect. Is it a real number? Probably not, but it looks good in a headline." Will use both risk insurance and SPV models simultaneously, while early indications suggest IMF may participate in further EFSF enhancements, as per headlines in Bloomberg.

Meanwhile Mario Draghi who takes over as ECB President on November 1, announced on Wednesday that the central bank will continue purchasing bonds of EU countries in distress. "The Eurosystem (of central banks) is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission," we can read in the statement released today by the ECB. Draghi emphasized however that it is just a temporary measure to which the central bank has to resort due to the aggravation of the crisis in Europe and that in the long run national governments should tackle economic problems on their own.

There were a couple of other relevant headlines playing a positive role in today's risk appetite recovery. However, one stands above the other, which is a possible Chinese intervention to support the EFSF. As reported by AFP: “France favors China taking part in efforts to stem the euro zone debt crisis by helping boost its bailout resources, a senior government official said Wednesday.” Bloomberg added that Sarkozy is scheduled to call Premier Hu Jintao tomorrow to discuss the matter. Lastly, pressure remains on Berlusconi's shoulders to bring forward new austerity measures, who pledged to his EU counterparts action by November 15.