Expect heated discussions around some July 4th barbeques in the U.S. -- not just on the economy, elections and last week's Supreme Court ruling, but also on the follow-through to Friday's impressive surge in equity markets around the world.
Some see the trigger -- the European summit -- as lifting the dark clouds that have dampened investor enthusiasm and pose an "existential risk" for the euro area. Others remain skeptical, welcoming the better-than-expected outcome but characterizing it as insufficient over time.
Where investors end up on this spectrum boils down to whether they believe that European policy incrementalism can accumulate quickly into a beneficial tipping point; and this week will provide important insights on this. Let me explain.
It is highly significant that government leaders have evolved to the explicit pursuit of three major strategic initiatives that would place the eurozone's architecture in a much better place: namely, supplementing monetary union with fiscal union, banking union and greater political integration.
It is also significant that, by modifying regional crisis management mechanisms (and the ESM in particular), they understand the urgent need to break the vicious feedback loop between weak banks and deteriorating sovereign credit worthiness.
Unfortunately, government leaders are still falling short of the required policy breakthrough.
The policy timetable is still too timid given conditions on the ground, and the operational procedures too cumbersome. Funding lines for the emergency facilities remain partial and divergent national political narratives can confuse things (including statements over the weekend out of Finland, Germany and the Netherlands).
So, for the risk-on phase to build adequate momentum, Europe needs to add to its policy progress and also minimize headwinds. Over the next few days, investors will receive three important indicators on this.
First, investors will learn on Thursday whether last week's summit provides sufficient air cover for the ECB not just to cut its 1 percent benchmark rate by 25 to 50 basis points but also to support peripheral bonds (through the reactivation of the bond purchase program (SMP), another LTRO, or a new mechanism). It is not clear whether the central bank's governing council is there yet.
Second, they will monitor the resumption of negotiations between the Greek government and the Troika (consisting of the ECB, EU and IMF) -- a complicated affair, especially as the assumptions underpinning prior agreements have been overtaken by unfavorable economic and financial developments. It is not clear who would put up the money to compensate for both this and for the new government's electoral commitment to stretch out the pace of domestic economic adjustment.
Lastly, Friday's monthly employment report out of the U.S. will have an impact, and especially so after Monday's disappointing (ISM) manufacturing numbers.
For Europe to minimize external headwinds, the U.S. needs both to avoid another sub-100,000 job creation print and to deliver improving indicators of long-term unemployment and labor force anticipation. Absent that, joblessness will again become a substantial leading indicator (and not just a lagging one), dampening consumer confidence, spending and companies' investment in plant and equipment -- all of which would worsen employment prospects.
This week's July 4th holiday in the U.S. will feature the traditional and enjoyable mix of parades and picnics, culminating with fireworks across the country. Throughout, investors will anxiously hope for additional policy measures, particularly out of Europe, that enable them to breathe easier and perhaps even add to their celebrations.
Cross-posted from CNBC.com.
Follow Mohamed A. El-Erian on Twitter: www.twitter.com/elerianm