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WEEK IN FOCUS REPORT INCLUDING: China has responded to market demands and lowered its RRR by 50 basis points
Victorian novelist and playwright George Bernard Shaw said “if all economists were laid end-to-end, they would not reach a conclusion.” Although this comment was made just under a century ago, it seems appropriate now more than ever in the light of the perpetual Greek bailout talks. However, the one-step-forward-two-steps-back strategy of the Greek government may finally be over this week due to ever increasing signs of a final approval due today. On Saturday the Greek cabinet approved a final set of austerity measures requested by the EU and IMF, and following a pre-meeting Eurogroup conference call on Sunday; many market participants are looking forward with optimism to any key announcements made following today’s EU Finance Ministers’ meeting. This optimism was evident in the close last week, with the S&P 500 approaching its highest level since May last year and the DJIA posting its highest close in almost four years.
This leaves a few possibilities for Greece. The country could secure the second bailout and avoid a chaotic, messy default with a permanent Troika presence in Athens overseeing the government’s every move, including full commitment to austerity.
A second option is Greece remains tantalisingly close to securing a bailout but the restructuring talks do not quite succeed. The Troika may then act mercifully and cover the EUR 14.5bln debt repayment costs on March 20th but lose face, credibility and future bargaining power in the process, although crucially avoiding a Greek default.
The final option is debt restructuring talks collapse; the Troika withdraw all offers of support and Greece face default in a month’s time with hopes of a steady European recovery cast into shadow.
The focus for investors however may not solely lay on the Greek outcome. Bondholders will also be looking towards Portugal, Ireland and even Spain and Italy to decide for themselves if Greece really is a one-off and an exception to the rules. Many prominent fixed-income analysts have said the most important aspect for policy-makers at the moment is not preventing default in Greece, but reassuring markets that they will not go through this laborious process time and again in the weaker European economies.
Energy markets may experience volatility this week following reports from the Iranian oil ministry, announcing that Tehran will cut the sale of crude to British and French companies. Many have noted that this would be a symbolic move at best, as many French and British companies have already, or are in the process of halting the purchase of these exports. However we may still observe price fluctuations as the nation becomes one step closer to cutting exports to other European economies that are yet to find replacement suppliers, including Spain, Italy and fragile Greece.
In global news, China has responded to market demands and lowered its RRR by 50 basis points, in an effort to boost liquidity and ensure a soft landing for the Asian economy. Although there is no significant Chinese data this week, this change may be reflected in data releases once the effect has trickled through.
Other risk events this week include the release of the BoE minutes for their February meeting, wherein the central bank kept the base rate on hold but expanded the total amount of QE by GBP 50bln. This release will show the MPC’s reasoning behind these decisions. We are unlikely to see anything in the way of new forecasts or predictions for the UK economy as the BoE released its quarterly inflation report last week, predicting a steady decline in inflation and a mild economic recovery beginning in the second half of this year.
