Europe holds the key to the direction of stocks for the rest of this year and that goes double given the lack of financial help offered by the G20 members in the meeting over the weekend.

Apart from the ongoing Greek dramas, there is now a new focus on Italy, which has a debt level in the ‘unbailable out’ category!

Last week saw Wall Street close down 2% after putting in five weeks of gains. This could be an ominous omen with the Greeks struggling to create a unity government, despite the PM winning a confidence vote on Friday. But with only five weeks of money left in the Greek coffers before bankruptcy would be declared, time is of the essence in sorting this problem out.

Greece is a mess with the economy expected to contract by 10% in 2012. Unemployment is at 17% and youth unemployment at a staggering 43%!

Adding to the market gloom is the G20 (Group of 20 nations) meeting, which offered no circuit-breaker to raise confidence in the European Union’s bailout plan. This plan would have looked to have had more potential if the member countries had pledged money to the rescue fund.

On the plus side, the European Central Bank (ECB) cut interest rates last week, which could soften the expected recession in Europe.

A global monetary easing cycle is now clearly underway with 22 central banks lowering interest rates over the last two months. This is a positive force for risky assets, helping to provide some offset to the European soap opera.

At home, the Reserve Bank of Australia (RBA) cut interest rates by 0.25% to 4.50% last week. The RBA’s Quarterly Statement on Monetary Policy backed up the move by revising down both growth and inflation forecasts. While the outlook painted by the RBA for trend growth and inflation at the middle of the target range doesn’t suggest an urgency to cut rates again, the RBA’s acknowledgment that the risks are skewed to the downside and its expectations that the terms of trade have peaked and unemployment will rise all suggest that its bias is towards more interest rate cuts.

Given the uncertain global backdrop and its flow onto domestic confidence, one rate cut alone is unlikely to be enough to inspire a sustained pickup in the housing and retail sectors.

Barring a blow-up in Europe, the RBA is likely to sit on its hands in December, but my inclination is to see more rate cuts on the way with the meeting in early February being the next one to watch closely (the RBA doesn’t have a rates decision slated for January).

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