Now that the markets are slowly (or rather quite fast by the way credit and government bond yields have moved) digesting last Thursday’s news that the European Central Bank will be injecting up to €60 billion of monthly asset purchases, effectively printing more money, we have the outcome of the weekend’s Greek elections to contend with.
To start with, as had been widely anticipated, anti-austerity leftists group won the elections with the next Prime Minsiter expected to be party leader, Tsiparas. But what does this Syriza win really mean? First and foremost, it is expected to instil greater uncertainty over Greece’s future in the euro-zone and could well threaten to reignite a broader crisis across the currency union.
Clearly, Syriza did not win an absolute majority (falling just two seats short of this), however, initital reports indicated that the winning party is in talks to enter into a coalition with centre-right party Independent Greeks, whose stance on austerity is somewhat similar to Syriza’s.
What’s next on the agenda? Firstly, to secure an extension to Greece’s current bail-out, set to expire by the end of next month. Despite being within budgetary expectations, the government is faced with chunky bond redemptions in 2015, and will not be able to meet its financial obligations should it not be in a position to secure additional financing.
Secondly, and this remains key, is whether the newly formed coalition and the Troika agree on the possibility of restructuring Greek’s debt. It however seems clear that the Troika will not budge on refuting Syriza’s proposals to cut taxes, raise government spending and increase the minimum wage.
On the other hand, we have already had Germany’s Angela Merkel, amongst others, stating that the euro-zone can withstand a Greek exit. After a strong showing at the polls, Syriza will have to deliver on their call for change, the last thing it wants to do is rub the electorate who voted them to power the wrong way and succumb to pressure from the Troika.
We expect a stalemate in the coming days, with either party giving way. Whatever the outcome, and the longer the uncertainty continues, we do not exclude a contagion risk effect spilling over onto peripheral eurozone countries.
On the economic data front, January’s rise in the German Ifo index indicates that initial fears about the effect of the Greek crisis on the German economy have been perhaps a bit overdone, and have been superseded by the positivity brought about by the perceived benefits of a weaker euro and ECB quantitative easing.
This increase also reflects a rise in sentiment in the manufacturing sector, mainly on the back of a weaker euro. As the euro’s weakness continues to aid exporters (making their products more affordable) coupled with prospects that QE might drive businesses’ borrowing costs lower, we do not exclude an increase in consumer confidence, resulting in a trickling upward of growth.
Meanwhile, as the strength of real economic growth and employment suggest that the Fed should begin to raise interest rates imminently, markets remain wary about the lack of wage increases, stubbornly stick inflation.
These factors coupled with a scenario whereby we have seen volatility remaining uncomfortably elevated can convince Fed officials to postpone the rate hike to the latter part of 2015. In view of this, we do not exclude Bernanke’s statement to include that, collectively, Fed officials "can be patient in beginning to normalise the stance of monetary policy." Despite this, and perhaps the timing of this seems to be opportune, we await confirmation of Q414 GDP data whilst wage data on Friday could also prove pivotal in the trajectory and timing of the Fed’s next key rate hike.
It is a relatively quiet day today for European economic data. The same cannot be said for the US as we await durable goods, flash services PMI, consumer confidence and new home sales, amongst, whilst momentum in US earnings season continues to gather pace, with names such as Apple, Pfizer, Caterpillar, Yahoo, Facebook and Boeing amongst the key blue chip companies in the US announcing their results this week.
The outcome of US earnings season will continue to set the tone for equity markets for most of the week, whilst tomorrow’s FOMC meeting will also be interesting in terms of the time of the Fed’s tightening of monetary conditions.
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.