For many investment funds and money money managers, the fate of 2011 is now truly binary. The confluence of two key events — the Oct 23 EU summit in Brussels and G20 summit in Cannes on Nov 3-4 — will now define the rest of the financial year worldwide.
If — as now seems possible — the European Union, backed by their G20 allies, finally unveil a package of credible measures to stabilise the euro zone sovereign debt and banking crisis, then there could be a whopping year-end rally in global equities, emerging markets high yield debt and even commodities. A policy accident and credit-fueled disaster will have been averted and the looming threat of double-dip global recession or even years of depression may recede again to allow businesses and households breathe again.
Of course, it’s entirely possible the summits fail to deliver amid ever more national and ideological posturing and wrangling and the drawing of phony ‘red lines’. At which point, money will go to ground again and markets could easily tank ahead of Christmas to mark a bleak mid-winter of doom and gloom, further sharp rises in unemployment and business retrenchment.

So far in the infant Q4, the tilt has been more hopeful. Just as the market mood hit its darkest all year, the Sarkozy-Merkel/Franco-German alliance appeared to wise up and admit a need to bite the bullet. This triggered significant market rallies everywhere. World stocks  bounced up to 10 percent  and European bank stocks alone snapped back 15%.  Dexia’s near collapse may have been the final straw to convince Germany to go the extra mile and France to acknowledge German grievances for the sake of a Sarkozy-led G20 deal. With French Presidential elections next year and France currently chairing G20, Sarkozy may want his own Gordon Brown “save the world” moment from April 2009 (although it didn’t do GB much good at 2010 UK general election).
But, for investors, the parallels with the London G20 summit of April 2009 are obvious. Stock markets began recovering amonth earlier  in March of that year on signs of a significant series of global financial agreements on bank support, coordinated fiscal stimuli and IMF recapitalisation to underwrite early signs of a recovery in business activity that Spring. That stock market recovery, goosed by a series of money printing from the US and UK, lasted for two years.

For some funds, markets are currently just priced for “muddle through” on the policy front, with all the attendant volatility, ‘event risks’ and double-dip risks. Like in 2009, valuations look relatively cheap barring full-scale systemic shocks. Therefore, most now reckon an EU/G20 deal involving a credibly deep Greek haircut of circa 50-60%, an adequate European bank recapitalisation facility via the EFSF/EBA etc and the prospect of ringfencing the rest of the euro zone with a medium-term joint euro bond plan could unleash signifcant buying over the six weeks to Christmas. It’s been a tough year for funds. Neither traditional institutional funds nor more nimble hedge funds have done terribly well and rally of  6 percent or less in world equity, junk bonds and commodities by January would take those indices out of the red for year.   

And, just like 2009, if you’re looking for some underlying tailwind from the economy, then U.S. and European numbers continue to defy disastrous signals from business and household surveys. For example, a big 1.4% jump in euro zone industrial production in August (which marked the heart of the current wave of the crisis) stands in stark contrast to manufacturing PMI for the same month pointing to contracting activity. And that production surge was led by Italy, Portugal and Ireland. Also, for those who still look at shipping prices for a lead on trade activity, the Baltic Freight index (which dropped by two thirds at the end of last year) has surged about 70 percent since early August. That’s clearly not pricing for a Chinese hard landing or global trade collapse.
So, next week is sandwiched between the Paris G20 finance ministers gathering this weekend and euro zone finmins next Friday before the big EU summit the following Sunday. And all this will be against the backdrop of a deluge of US Q3 earnings (Apple, Intel,  IBM, Microsoft, GE, Honeywell, Citi, Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley etc)  giving markets a reality check on how the mega multinational companies have been performing through all the macro policy hullabaloo. Chinese Q3 GDP and Sept production data Tuesday will also be critical for those fretting about the risk of a hard landings there. UK inflation data, BoE minutes and a set-piece Mervyn King speech will hold a mirror to the recent decision on QE2 in Britain. A major Bernanke speech, German and US business sentiment, Brazil and Turkey rate decisions complete the picture.