SCOREBOARD: European heartache

With market price moves centred on Greece, there's no logical catalyst for a near-term turnaround. But markets aren't always about logic.

Well equities took another tumble on Friday night as we know – except in Greece and Spain that is, with Greek stocks in particular bucking the global trend with a 2.5 per cent increase. Still, it hasn’t been a pretty week, in what has become a highly recognisable pattern. Looking around the globe stocks are down over 4 per cent for the week in the US and about 5 per cent in Europe and Australia.

Bond yields in turn are either at or near record lows – with Spain and Italy bucking that trend. Given that price moves have all been about Greece, you can’t logically say there is a near-term catalyst for a turnaround – the Greek election isn’t till June 17. But punters may soon become bored, fatigue may set in and the bid may return. Or alternately we may see another stream of bank run rumours (you only need a rumour for it to become real) or ratings downgrades and markets will be hit further. When hysteria sets in, anything is possible and it’s completely unpredictable.

Events over the weekend didn’t shed any light. We had the G8 summit and it’s not like you normally see too much out of these meetings, but there is a sense of apprehension at the moment. Importantly there is nothing new for Greece. The G8 nations reiterated that it is desirable for Greece to remain in the eurozone but noted they had to stick to their commitment to live within their means and stick with the reform program. In an interview, German Chancellor Merkel said, "Everyone who was part of the discussion today, and all the G8 countries, want Greece to remain in the eurozone – provided Greece meets the commitments it has entered into." As I’ve mentioned before – and it’s not well understood in the economics world – austerity isn’t a choice.

In or out of the eurozone, Greece must live within its means as no one is prepared to lend to them at rates they can afford. Full stop. As an aside, I’ll show in my Eureka article this week why a currency devaluation would not help Greece – this is wishful thinking more than anything. But on the broader issue of growth versus austerity, like there was a choice, German Chancellor Angela Merkel said they were two sides of the same coin and that France and Germany were united on the issue. She noted, in what should be common sense but strangely isn’t, that increasing growth via increasing debt (which is what further stimulus programs would require) is not sustainable. The only other thing worth noting is the strong rhetoric coming from the EU. The European Council President said the EU will do "whatever is needed to guarantee the financial stability of the eurozone."

Canadian inflation was about the only data out on Friday night and it was of course stronger than expected and above target. Let’s see what the G8 do about oil though. Inflation is set to moderate temporarily, deepening on how long this latest drop in oil prices lasts. As I’ve mentioned previously, the US is desperate to distort the free market again and force the price of oil down. So far it has engaged in jawboning and of course Greece has done the rest. But Obama is committed. Stay tuned.

There are reasonable questions about the impact the EU oil embargo on Iran (announced some time ago) could have on oil prices, but there are questions as to how effective it would be anyway. More to the point, discussions about tapping oil reserves, of which the G8 made no mention, but the US wants to do, haven’t necessarily just revolved around Iran. Other than Canadian inflation though, there wasn’t much – just German producer prices, and they eased a bit in April, rising 0.2 per cent in the month and 2.4 per cent annually.

Looking through the week ahead it’s fairly devoid of data as well, which is unfortunate given the acceleration in global growth that we’re seeing – it’s about the only good news out there. For the US, most of the data is about the housing sector, which we already know is not that great, but recovering slowly and, given the global real estate boom of previous years, is the weak link in many economies. Suffice to say it is unlikely we will learn anything new from that or durable goods and jobless claims, also out this week. For Europe, the Germany’s IFO survey will be the centrepiece but the less rigorous PMIs are also out. Elsewhere, it’s worth watching for UK CPI, retail spending and the BoE’s minutes – and we also get the breakdown of first-quarter UK GDP.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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