Markets approach the end of what has been a pretty difficult week. The single currency has made news lows for the year (vs. the USD) and markets have no more faith in the ability of eurozone leaders to quell speculation around a Greek exit as anti-bailout parties retain their lead in the Greek election opinion polls. We’ve also seen the capitulation of the single currency, something which we talked about earlier this month, where the euro has been the weakest currency in a period of dollar strength, rather than the more traditional high-beta currencies, such as the Aussie. The price action on the single currency this week means that we run the risk of short-covering activity into the weekend. Also, the Swiss franc is worth keeping a small eye on after yesterday’s volatility (at least compared to recent activity), which was mostly on the back of - so far - denied rumours of further measures to quell currency strength.
German Ifo moves to reality. As well as the now traditional weakness in the flash PMI estimates for Germany, France and the eurozone as a whole, yesterday’s survey from the German Ifo institute has recorded a sharp fall from 109.9 to 106.9. This is the sharpest monthly decline since August of last year and we’ve only seen five falls of more than this in the past six years. The survey had been out of kilter with some of the other indicators on the economy, not least the PMIs, so today’s numbers bring it more into line with other evidence and also the actual recent GDP readings. Despite strength seen in net trade in the further details of German GDP released this morning, the perception that the German economy somehow can remain immune from events in the rest of Europe has been weakened of late. At the same time, Germany is grappling with the creeping effects of very low interest rates on its economy (beyond the benefits on the funding front), the impact of which is starting to be seen in wage demands and other areas. The question is to what degree is Germany prepared to tolerate this in the face of the greater eurozone good? There have been some signs of movement but don’t underestimate the intransigence that pressure from outside Germany to tolerate higher inflation will be met with.
The running-out-of-time in Europe. The Brussels meeting between European leaders simply went around and around the same old policy cul-de-sac which, at this late stage in the crisis, rendered the whole conversation completely superfluous. Separately, senior finance ministry officials from across the eurozone held a conference call on Monday to discuss contingency arrangements should Greece leave the single currency. To add to the simmering tensions within Europe, the Bundesbank railed against any suggestion that the terms of Greece’s bailout should be relaxed in any way. Yesterday’s dreadful PMI data out of Germany and France simply perpetuated the negativity. Clearly, confidence in the euro, its politicians and its structure is cratering. Over the course of this month, money managers of all descriptions - whether they be of pension funds, institutions, sovereign wealth funds or high net worth individuals - collectively have been taking evasive action through selling euros, further reducing bond exposure to Europe’s south and buying either northern bonds or other safe-haven bonds (UK gilts, Swiss bonds, US treasuries), further reducing southern European equity exposure and switching deposits out of southern European banks likewise into either northern European banks or across into London. This euro-capitulation probably still has some way to run, if only because once Greece does leave then depositors in the south are likely to accelerate their efforts to pull deposits out of local banks. One interpretation of what is happening is that the wealth of southern Europe is rapidly being sucked out into safer climes such as Berlin, London and New York. For now, fearing the worst for Europe is probably the right call. European leaders have run out of ideas, they have run out of money and they are running out of time.