May 14th 2012: Weekly preview - Brinkmanship will sink the Euro
Greece will inevitably dominate the week ahead as domestic political parties and German government test the current policy structure to destruction with a game of bluff, counter bluff and brinkmanship. It will be extremely difficult to put the Greek Euro exit genie back in the bottle even if all sides attempt to pull back from the precipice. Meanwhile, as capital will continue to vote with its feet, the Euro is set to remain under selling pressure. If no Greek government can be formed by May 17th then new elections for June will have to be called. Given that the last thing the Euro-zone needs is another four weeks of policy vacuum and paralysis, elections would deal another blow to the Euro.
As it stands, SYRIZA has refused to join a coalition government, obviously concluding that it is better placed to gain additional support if new elections are held. The current moves are inevitably all dominated by game theory and the calculation is finely poised as SYRIZA could quickly shoulder the blame if the calling of new elections effectively pushes Greece into the abyss. Meanwhile, the government has warned that it could run out of funding in six weeks if the EU agreement is not honoured. Even if there is an agreement to form a coalition government, relief will be very short lived as policy paralysis will continue with very little chance of salvation and Euro spikes higher will be met will strong selling interest.
German Chancellor Merkel has faced another setback with defeat in the crucial North Rhine-Westphalia state election which will increase political pressure on the government and make it even more difficult to grant political concessions.
The Euro-zone economic releases will be dominated as far as the media is concerned by the GDP data. The three largest economies are due to report their first-quarter GDP data on Tuesday, along with the flash Euro-zone estimate. The consensus is for a combination of stagnation in Germany and France, allied with contraction in Spain and Italy, will lead to a GDP contraction for the Euro-zone as a whole. Any figure worse than -0.2% would reinforce the depth of pessimism surrounding the economic outlook and reinforce fear. The German ZEW survey due on Tuesday will probably be the most important release from an economic perspective given that it is more forward looking. Last month’s survey was much stronger than expected and sentiment this month will have a key impact.
From a Euro perspective, there will be mixed implications from the data. A strong reading would tend to bolster optimism surrounding the German economy and maintain inflation fears which would make any German concessions on economic policy less likely. In contrast, a much weaker than expected release would increase German fears over a sharp economic downturn and increase the potential for a policy shift as economic fears finally hit Germany.
There are a series of US economic releases which will have an important, but probably not decisive market impact. The New York and Philadelphia Fed surveys both recorded important slowdowns for April, but this did not translate into a weaker figure for the national PMI index. This temporary breakdown in correlation may lessen the impact of this month’s data, but sharp declines in both indices would increase concerns surrounding the economy and the murmurings of additional quantitative easing would again grow louder.
The consumer inflation data will be watched very closely on Tuesday and it would be dangerous to under-estimate the potential impact. The Fed has had the luxury of virtually ignoring the inflation data since the 2008 financial crash, but an elevated reading would lessen the potential for further quantitative easing. The FOMC minutes on Wednesday will be examined closely to determine the underlying undercurrents within the Fed and hope much support there could be for further quantitative easing.
The domestic UK economic week ahead will be dominated by the Bank of England inflation report and the press conference by Governor King. The bank’s take on the economy will be critical in determining whether there will be further quantitative easing during the second quarter. Confidence surrounding the UK economy is likely to be generally weak, especially with renewed uncertainty surrounding the Euro-zone outlook. The bank is likely to face big difficulties with its inflation forecasts, especially as inflation has stubbornly refused to decline despite weak output. The latest UK unemployment data will also be released on the Wednesday. Immediate Sterling trends are liable to be influenced to a large extent by safe-haven demand as the Euro area implodes. The Swiss National Bank is also likely to face a week of increased pressure given the risk that pressure on the 1.20 Euro minimum level is liable to intensify.
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