January 22nd 2012: Weekly preview - Keeping fear in check
Global central banks and the ECB in particular have succeeded in averted a catastrophic credit crunch at the start of 2012 and a strong performance by equity markets has helped ease pessimism as a tide of central-bank liquidity has lifted sentiment. The situation remains extremely precarious and only a very minor setback could trigger a fresh spasm of fear. Underlying de-leveraging within the banking sector will still be the dominant feature and it will remain an up-hill battle to keep fear in check, especially given the on-going sovereign ratings fears. This week may prove to be relatively benign, especially with many Asian markets closed, but there is no room for complacency and fading risk rallies still looks the most advisable approach.
The on-going Greek debt negotiations will continue to be an important market focus following the apparent break-down in talks late on Friday, especially as this is one of the potential triggers for a renewed collapse in confidence. To some extent, the negotiations are only a distraction as Greece will clearly default in one form or another. What is not known are the terms of this default and whether it will be negotiated or whether it will be a hard default. The damage will be lessened if Greece can maintain a full-blown default, although the damage will still be severe given the re-pricing of sovereign risk.
What certainly does matter is whether Greece’s Euro membership will continue once a debt agreement has been put together. Equally important will be the impact on the rest of the Euro-zone. This is particularly vital given the widening of Portuguese yields last week to a fresh EMU high. The critical element surrounding Greece is containing the contagion effect. If infection continues to spread to Portugal then there will be a fresh round of market fear and renewed Euro tensions.
The Eurogroup meetings on Monday and ECOFIN meeting on Tuesday will, therefore, be important for Euro-zone cohesion and comments surrounding the Greek situation will be monitored very closely to assess whether the contagion effect can be contained. German comments in particular, will be under very close scrutiny.
As far as economic data releases are concerned, the German IFO survey on Wednesday should maintain the recent upbeat tone surrounding confidence, although again there will be fears that the data has been boosted artificially by a lack of European and North American winter this year.
The Federal Reserve will start its first 2012 FOMC meeting on Tuesday with a decision due on Wednesday. There will be siren calls for more Fed action from the ultra doves on the board, but there is very little case for action at this time given the recent US trends.
Attention is likely to focus on the Fed’s new forecasting tools. The Fed will detail its interest rate projections in the medium term and, interestingly, the views of individual Fed members will be displayed. Although it is unclear at this stage whether forecasts will be attributed by name, the spread of opinion will be important. This will tend to reinforce any divergence between the hawkish and dovish camps and will give an important insight into the balance of power. The Fed Funds projections overall will be a useful source of information, but are unlikely to have a major impact at this stage given that market rates still assume that rates will continue to flat-line over the next two years.
The Bank of England minutes on Wednesday are likely to confirm a bias towards further quantitative easing during the first quarter as the economy remains in the doldrums, although the most likely outcome is that the bank will be slightly less pessimistic over the near-term outlook.
The UK GDP data released at the same time will assume vastly exaggerated importance, especially as it will be close to the zero level. The practical difference between a figure of +0.1% and -0.1% is very limited, especially as the data will be revised substantially. Nevertheless, there will be a fresh media frenzy surrounding recession if there is a quarterly contraction.
It is dangerous to rule anything out, but the Asian outlook in general and the Chinese outlook in particular will be overshadowed by the Lunar new-year holiday with Chinese markets closed for the week.
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