Friday, 11 May 2012

Week in Review: Unstoppable force to meet immovable object…

"Ballots are the rightful and peaceful successors to bullets" said Abraham Lincoln. In Greece they are the successors to bailouts - hopefully we won't get to bullets.

The week began with the much anticipated election results from France but, as we feared (Little Greece still matters more than Big France) it was the Greek ones that shocked investors. When the results were posted it was the unconventional, inexperienced but untainted Syriza (the Coalition of the Radical Left) who were the moral victors, falling just short of being the largest party in government.

The results made forming a government in Greece, the cradle of democracy, problematic. New Democracy had the first attempt but failed, passing the role on to Syriza. Their uncompromising attitude, promising to tear up Greece's bailout commitments, made an agreement impossible, but it did inspire the electorate meaning their chances of winning an election re-run outright are disconcertingly high (as confirmed by the latest poll-based projections).

PASOK (the left-wing half of the centrist duopoly) were the clear losers so it is with no small irony that the week ends with them having their turn at trying to form a government of Greece.

Source: Brewin Dolphin

Germans long on Machtpolitik
Syriza's combative tone was matched by fiery rhetoric from their potential benefactors in Germany. For those of us hoping that the ECB would provide some stimulus the Bundesbank President, Jens Weidman, declared that "monetary policy is no panacea for Europe."  Shame we all love a good panacea.

The government also got in on the act as finance minister Schaeuble helpfully declared If Greece decides not to stay in the euro zone, we cannot force Greece" and foreign minister Westerwelle reiterated that the fiscal pact is decided and stands.  Such rhetoric is either brave or foolish. While the euro club may regret Greece's original entry into the zone, they will be aware that its exit risks an unknown degree of crisis and contagion.  Furthermore, it necessitates the loss of all outstanding loans previously advanced to the Hellenic Republic.

but short on Schadenfreude

The other reason that Germany should be thankful for its profligate peers was underlined as trade and industrial production figures were reported.

The Eurozone itself has on average run a balanced current account (spending what it earns) but that masks a host of imbalances that lurk within.  Unsurprisingly those countries which have competitive underlying labour and product markets (Germany and the Netherlands) have moved into surplus, while those with rigid underlying markets (Portugal, Italy, Greece and Spain) have moved into deficit. Germany’s exports rely on its neighbours maintaining their imports. 

Source: Datastream/Brewin Dolphin

Economic news, dull but not dismal…

Apart from Germany’s expectation-beating industrial production numbers, the other European and major economies were close to expectations. That included China, where a series of numbers released on Friday confirmed that the Chinese economy is slowing and inflation is falling.  That should pave the way for further fiscal loosening as the year progresses, with a reacceleration of growth tentatively hinted at by modestly improvement in purchasing managers indices.
Source: Datastream/Brewin Dolphin

Such trivialities as economic growth however seem set to remain an afterthought as politics dominates investors risk appetite. There was however, still time for JP Morgan to throw its stock specific spanner in the works too.

Credit & credibility…

News of investment banking’s safe pair of hands dropping a $2 billion credit derivatives whoopsie was just what nervous markets didn’t need. The group earns around twice that in the average quarter and so it is far from a ‘systemic’ event.  Nevertheless it does cast doubt on the group’s internal risk controls and the reputation of CEO Jamie Dimon, who, had reportedly bemoaned that regulators “make trading sound like someone's sitting there, guessing.” Yesterday Mr Dimon had to admit the group had engaged in “a bad strategy, it was badly executed. It became more complex, it was poorly monitored.”

So ends a week of poor headlines overshadowing underlying progress. Hopefully by the end of the weekend we will see a unity government, allowing investors to focus on next weeks inflation data from both sides of the Atlantic.

Guy Foster 
Head of Portfolio Strategy

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