Weekly Financial Market Review (June 2012 week 2)
Monthly losses in equity markets and high yielding currencies could see additional downside extensions as news headlines are likely to remain fixated on the banking sector in Spain as well as the upcoming election outcome in Greece. In Spain, most of the negative sentiment has been driven by private loan defaults and sharp declines in real estate property prices. This resulted in a substantial downgrade in the country’s credit last week, as the Fitch agency lowered Spanish credit by 3 notches to BBB. The latest IMF report shows that commercial banks will need to raise $46.6 billion in order to cover the losses stemming from the defaults but this is at the low end of market analyst expectations which run as high as $60 billion.
With recapitalization in Spanish Banks likely to remain a central focus, potential for upside in the Euro could be seen if the European Finance Ministry is able to structure a plan the market views as credible. A positive outcome would bring a lift to equity markets as well but any rallies will be seen by many as selling opportunities as central bank’s continue to make monetary policy more accomodative as a means for promoting economic growth. The latest examples of this came from the People’s Bank of China, and the Reserve Bank of Australia, both of which lowered interest rates last week in light of regional slowdowns in manufacturing.
The other main even risk in the Eurozone can be seen with the upcoming elections in Greece, where the central question will be whether or not the country is able to form a majority government that is committed to implement austerity requirements that have been established by the European Finance Ministry. Without these austerity measures, it will be difficult for Greece to receive the bailout loans, so the platform of the next elected government in Greece will be heavily scrutinized by investors.
The election results will be finalized on June 17th, so traders should remain watchful of price activity into this period. Any suggestion that an anti-austerity party is leading will likely lead to speculation that Greece will be forced to exit the Eurozone. Needless to say, an event like this would bring enhanced volatility to all asset markets as the uncertainty element would only add to the risk aversion that has been the central theme of the last two months.
Next week’s economic data will come with Italian GDP and German Producer Price Index (PPI), while wider Eurozone data will be seen with the monthly Industrial Production survey and the Consumer Price Index (CPI). Data out of the US will be equally significant, with Retail Sales, PPI and CPI, Treasury Inflows and the University of Michigan Consumer Sentiment survey. While most of the market’s attention will likely be driven by news headlines, shorter term volatility will be driven by these individual releases, as traders look to assess growth figures as a means for determining the likelihood of further economic stimulus programs from global central bank authorities.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.