Greece has a Government, but will it calm global fears of a Euro breakup?
Week commencing Monday 18th June 2012
Overriding Market Theme
2 year UK note yields fell for the second week running on continued speculation that the Bank of England will buy more government debt to support the beleaguered economy. The Bank of England plan will see at least 5 billion pounds a month injected into the financial system, a plan designed to free up banks’ balance sheets and allow small firms easier access to credit. A separate plan will also allow lenders to swap assets with the central bank in return for money to be loaned to companies and households. This can only add to the government’s arsenal of weaponry to try and tackle the double dip recession that has plagued the UK, but will it be enough if the situation in the Eurozone deteriorates further?
Spain seems likely to miss its budget targets for the year as the government is told to adopt wider reforms to reduce its debts. The Spanish are currently implementing massive spending cuts to try and slash its budget deficit from 8.5% to 5.3% in 2011, but these cuts have caused huge discontent within the Spanish population. Like their British cousins, the spending cuts and tax rises have undermined the economic recovery in Spain. The country is back in recession and its banks are severely under-capitalised given the collapse in the Spanish property market. The 100 billion Euro bailout of their banking system seems to have failed in restoring confidence, and with yields on Spanish government debt hitting 7% in the secondary market, something is likely to give.
World leaders meeting in Mexico will boost the 430 billion US Dollar firewall the International Monetary Fund announced in April. The group of 20 leaders are gathering in Los Cabos for a 2 day summit which is likely to be dominated by the financial crisis in Europe and the contagion risk for the Global Economy. This comes while both the U.K. and France, the two largest European economies after Germany, each boosted their holdings of U.S. Treasuries by more than 26 percent in April amid the fiscal crisis in the Euro region, while the total international demand for U.S. financial assets slowed. The U.K. portfolio of treasuries rose by 26.5 percent to just over 154 billion US Dollars, although this still remains a snippet of the 1.15 trillion US Dollars held by China.
Greece’s largest pro-bailout parties, the New Democracy and Pasok parties, have won enough seats to forge a parliamentary majority. The election would give New Democracy and Pasok 162 seats if they agreed to form a coalition in the 300 seat parliament. This will likely come as a relief for markets as potentially this result could end the Greece question once and for all. The vote forced Greeks, who are in their fifth year of recession, to choose between open-ended austerity to stay in the Euro, or reject the terms of the bailout agreement and risk the turmoil of exiting the seventeen nation currency.
GBP This Week
Apart from the obvious discussions in the G20 summit in Mexico, Monday’s Rightmove HPI release will likely form the basis of Monday’s data set. Tuesday moves into more serious territory with UK CPI, which is expected in flat against May’s 3.0% annualised figure. Moving through to Wednesday, we have the Claimant Count Change, which measures the change in the number of people claiming unemployment related benefits, which I expect to continue falling after a near record reduction last month. Wednesday also sees the release of the MPC Minutes, which I hope sees Mervyn becoming more hawkish in his approach. We finish off the week with UK Retail Sales on Thursday, which should find itself in positive territory after last month’s dismal -2.3% fall.
With the positive news out from Greece, we should see some EUR strength moving against the Pound. Sterling should however also benefit from a resolution to the crisis, and should move against the current lows it faces against the greenback and other majors.
USD This Week
Friday seems to be the highlight of the week for the US with Unemployment claims set to be released down 5k and existing home sales down 3k. The Philadelphia Fed Manufacturing Index is also due on Friday, which I expect to close in positive as manufacturers change their outlook on the US economy. Wednesday is dominated by the Federal Open Market Committee releases, as they are planned to release both a statement, an economic projection and hold a press conference.
If the Greek election does to global markets what many predict, we should see some dollar sell offs as global investors seek high yields from European and Asian currencies. We do expect this relief to be short lived however as investors continue to worry about the state of Spain and its borrowing costs.
EUR This Week
German ZEW Economic Sentiment will head up the European data releases this week, which we expect to come in lower than previously reported at 3.6, however the Greek election will most likely dominate until a coalition has officially been formed. The week is also host to a number of Manufacturing and Services releases for Both Germany and France, which should all close reasonably flat against their previous releases.
Mario Draghi is due to speak on Thursday, which could potentially provide the markets with the best opportunity to find volatility.
In Other News
England gave their usual nail biting performance this weekend, with a 3 – 2 victory over Sweden, a team which England had seemed to find impossible to beat. Roy Hodgson really shifted the balance of power by bringing on Theo Walcott at a time when England was really struggling to remain in the game. It seems that we might have found a manager who knows what he is doing. What’s next, well Rooney is set to leave the side-lines and join his squad for the Ukraine match! Let’s hope that we perform again against the host nation and that Sweden don’t go out without a fight and really give the French what-for!
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