NEW YORK (CNNMoney) — Once again, investors all over the world will be looking to Europe to determine how to bet on the markets.
The big difference next week: Investors have a newfound faith that central bankers and politicians will work together to keep the markets from falling into disarray.
There’s that much more pressure on the leaders of 27 European Union nations to give the market answers to how the sovereign debt crisis can be cured when they meet in Brussels on Thursday and Friday.
And investors will be listening carefully to whether Mario Draghi, the newly installed President of the European Central Bank, will consider buying bonds to help the European economy following the bank’s regularly scheduled policy meeting Thursday.
The world’s central bankers affirmed their superhero status by averting what might have been a swift credit crisis when they worked together to make it easy to move cash, specifically dollars, into Europe this week.
“The mechanism of the financial system works on expectations,” said Michael Gayed, chief investment officer at the hedge fund Pension Partners. “The crowd wants to interpret it as ‘Super Ben and the league of extraordinary bankers’ are here to save the day. They saved us and will continue to save us.”
The central banks’ actions indeed sparked a rally with the Dow (INDU) and the S&P 500 (SPX) inking their best weekly gains since 2009. The indexes moved up 7% and 7.4%, respectively. The Nasdaq (COMP) rose 7.6% for the week.
While Draghi isn’t expected to announce a plan for the European Central Bank to buy bonds, investors will be listening to his language to see if he and his colleagues appear more amendable to launching a round of quantitative easing.
“Everyone will be reading into the rhetoric,” said Joseph Tanious, market strategist at J.P. Morgan Funds. “Are they providing us with any details as to how they plan on getting ahead of this crisis?”
After this week’s actions, investors are expecting that at next week’s summit in Brussels, EU leaders will move forward with a plan for a fiscal union.
Upping the ante is news that U.S. Treasury Secretary Timothy Geithner will meet with Draghi and senior EU officials ahead of these meetings.
Still, if EU leaders give the appearance that fractious battle lines are being drawn, investors could rapidly rewind their bets.
“Investors are becoming more confident in a solution being arrived at,” said Robert Tipp, chief investment strategist at Prudential Fixed Income. “There’s a bias to the downside next week given that a lot of optimism was priced into the market this week.”
There’s a theory that world markets moved too close the brink of collapse this week before central bankers intervened, and no single EU leader wants to be known as the one who sparks a worldwide financial panic. Fear of the unknown could foster compromises.
“The fever broke in Europe because of the central banks. There’s a sense now that the stakes are too high to have a disagreement about some sort of fiscal union,” said Gayed.
There are few economic indicators and few consequential company earnings reports on tap in the United States next week. None of the economic data points due out next week are expected to reverse the mostly positive economic picture painted by the jobs, housing and manufacturing numbers released this week.
“We’ve had a lot of key information come in that’s really solidified the growth picture in the United States,” said Tipp. “Now the market will return to watching to see whether Europe will pull us down.”