Greece vs. Germany may be an everyday occurrence in this sovereign debt crisis, but it's a fitting irony to have it played out via the beautiful game. Enjoy!
Looking at the markets' goings-on this week, it all started so positively, again. Greek election results showed New Democracy (ND: pro-austerity, pro-euro) beating Syriza (ditch the bailout, spend more, leave the €uro). Like the prior week though (when Spain asked for 'assistance' for its banks), the elation didn't last long. Profit taking quickly became flavour of the day as concerns rose regarding difficulties in forming a coalition or that ND would change its party line, demanding extreme softening of bailout terms. Thankfully, a coalition was quickly formed on Wednesday so Greece has new representatives for next week's summit. One market worry though is how quiet Syriza has gone. Waiting in the wings for this coalition to collapse? Ready to pounce with its radical demands?
A worsening in Spanish bad loans (the reason its banks need help) also spooked markets after the prior week's assistance announcement. However, the first phase of an independent report on the banking sector (full report expected September) suggests that it might not need as much as Europe has pledged (€50-60bn vs. €100bn). Nonetheless, borrowing costs for the nation remain worryingly elevated after bond markets sold off and debt auctions saw the country pay through the nose for even short-term paper. In the all-important global banking sector, the results of ratings agency Moody's 4-month review saw many institutions downgraded, between one and three notches. The UK's major four were all hit, as expected; Barclays ( by 2 notches), HSBC (1), Lloyds (1), RBS (1). It's a shame the punch bowl is already empty - late to the party, yet again.
Central bankers and disappointing macro data kept the week interesting. Hopes that the US Federal Reserve (Fed) would crank up its printing presses again (printing new money, devaluing existing - otherwise known as quantitative easing; QE) were dashed when Chairman Bernanke announced only an extension (until end-2012) of its 'Operation Twist' (sell short-term US bonds, buy long-term US bonds) aimed at bringing down long-term borrowing costs to encourage bank lending/consumer borrowing and economic growth. The fed also cut its US growth forecasts, again. The Bank of England (BoE) didn't announce any more QE either, but it looks likely it could do next m onth (its committee vote was very close). The two events saw the GBP/USD forex rate fall sharply (USD strengthened on prospect of no QE, GBP weakened on possibility of more QE). Both banks have held fire on QE for now, but claim to be ready to act if necessary. If they don't think things are bad enough in the economy just yet, maybe they should read the next paragraph. The stronger dollar saw commodities under pressure in the second half of the week.
On the macro data front, weak data dominated. China property price declines reinforced worries about the emerging market slowing. Manufacturing data has been poor from China through Europe and the US. Business sentiment was poor from Germany's ZEW and IFO surveys. US housing disappointed, with starts and sales missing expectations. US Jobless failed to improve, again. On the flip side, UK retail sales surprised to the upside and UK inflation slowed more than expected, fuelling expectations that QE might soon be necessary.
Euro-wise, there is still much claim by politicians to be doing "all that is necessary". Talk of banking unions, fiscal integration, sovereign debt market intervention and hold ups ratifying treaty-changes necessary for the new bailout mechanism (€500bn European Stability Mechanism (ESM) to work alongside existing €440bn European Financial Stability Fund (EFSF) are keeping journalists busy. Can Spain be helped without a bailout? Do we have a sufficient firewall to protect the euro region from a Spanish implosion? What if contagion spread to Italy? What about Greece? Politicians continue to fuel speculation, by opening their mouths, and being quoted. Next week's summit is sure to throw up p lenty of the same (words rather than action) prolonging the crisis. Then again, the bar is low. This one can't be any less productive than the last one, or indeed the G20 in Mexico last weekend.
With the weekend summit-free, election-free and, hopefully, bailout-request free (although Spain could always make formal request for financial assistance, after the results of the independent report), enjoy the supposed uneventful weekend, especially the Euro 2012 Football quarter-finals.
Michael is head of research at Accendo Markets. After a decade in equity and hedge fund research, he now focuses on market observations and trade ideas for execution-only clients. Tweet @Accendo_Mike
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Thu, 1st Jan - * Factory activity growth in China moved backed into negative territory in May sparking worries over the recovery as the world's second-largest economy stagnates.