The Global Markets Weekly 2/24/12

Posted February 24, 2012 by Editor

[private] Stalling Along a Wall of Worry

The financial market response to the belated Greek bailout deal has been understandably tepid.  In fact, the S&P index has stalled out, unable regain its 1400 plus high of 2008.  After an impressive 20% plus run since early October, a pause in the rally (or even a correction) is understandable.

First, the Greek bailout may only buy some time and the short-term outlook in Greece is far from secure (not to mention how precarious the longer-term position is).  The required austerity will be hard to swallow, particularly after the April elections in Greece may create an even less receptive environment.  Participation in the voluntary private debt swap will not be known until mid-March, a number of Eurozone parliaments have to give their blessing to the deal and the level of IMF participation is still uncertain.

Second, while recent data suggest that the Eurozone recession is getting no worse, it is not clear how much the improvement in bank liquidity from the first December LTRO is alleviating the ongoing credit crunch.  The credit crunch risks contributing to a deeper recession, particularly among those peripheral nations forced to adopt fiscal austerity.  The private sector response to second LTRO coming this week will important in helping the ECB decide if further easing measures are needed.

Third, the upward march in oil prices recently threatens growth prospects in oil consuming nations.  This adds to investors’ skepticism, many of whom remain unconvinced that the US has achieved a self-reinforcing recovery, despite the big improvement in employment growth recently.  Even if the closely watched PMI data in the US surprise on the upside this week, investors will still remain cautious, remembering how an even brighter outlook at this time in 2011 unraveled under the pressure of higher oil prices and other “special factors.”  Still, DE thinks that fundamentals remain positive and the shift in attitudes by central banks (especially the ECB) to provide liquidity and promote growth will provide a positive backdrop for the risk on trade.

• U.S.:  Bernanke’s two Humphrey Hawkins testimonies this week may be less important than usual (famous last words).  His cautious assessment of the outlook and his implicit bias to ease has already been delivered recently in both his January press conference and February testimony to Congress.  While both were given before the impressive February jobs report hit the tape, Bernanke is unlikely to upgrade his economic assessment greatly after “just one good number.”
• Eurozone:  The market reaction to this week’s second LTRO could be key in figuring out if the ECB decides further easing measures are needed.  The money and lending data may show if the December LTRO is softening the ongoing credit crunch.
• UK:  The array of survey data led by the mfg. PMI may point to a further firming in output.  While this may support the notion that the Q4 GDP weakness was exaggerated or temporary, the improvement in output seems to be based on working through order backlogs, a process which cannot last.
• Japan:  The slew of important economic updates this week will be watched for signs of upward momentum, particularly industrial production, where planning forecasts are upbeat, and the job-offers-to-applicants ratio from the labor market survey, which has shown encouraging improvements in demand.  The week also brings January consumer price index results (Fri), showing how far the BOJ is from its 1% goal.
• Emerging Markets/Regions:  Hungary will leave rates unchanged.  The outcome of the IMF/EU negotiations for aid remain unclear, the economy is stagnant, and inflation remains high.  The central bank of Philippines is expected to cut rates for the second month in a row.  Inflation is within  target and the bank worries about external headwinds.  Our view that an end to the economic slowdown in Brazil means the central bank will continue to cut interest rates and provide narrowly-targeted fiscal measures.  In Turkey we argue that central bank is moving in the direction of an easier monetary policy stance.

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