ÔÉėGreek bond prices plummet due to desolate state
of public finances
ÔÉėCommitment to ultra-loose US monetary policy is
ÔÉėECB governing council meeting unlikely to provide
boosts the dollar
This week the euro slipped below 1.40 against the dollar
again for the first time in six months. The Greek debt crisis is continuing to weigh on the single
currency. But market participants were also unsettled by the outlook on Japan‚Äôs sovereign debt being revised to negative and the US central bank gradually moving away from the ultra-loose
monetary policy. The dollar was
therefore the most sought after currency this week, not only
against the euro but against the yen as well.
Rumours that China might rescue Greece by purchasing ‚ā¨25bn worth of government bonds
were seen as proof of the desolate state of Greece‚Äôs public finances. The fact that Athens apparently prefers to seek help in Asia rather
than in Europe hardly boosts confidence in solidarity in the eurozone
either. Consequently, Greek bonds plummeted, which probably particularly
annoyed investors who had subscribed to a new ‚ā¨8bn 5- year bond at the
beginning of the week: in the first few days of trading alone, the bond‚Äôs value
dropped by ‚ā¨3. This disappointment is likely to have a negative impact on the
10-year bond due to be issued mid-February.
The other shaky candidates in the eurozone were also hit by
falling bond prices. Portuguese bonds were particularly affected, as rating agencies had warned
that Portugal would have to intensify its budget consolidation efforts.
Markets were also rattled by the news that S&P had cut
its outlook on Japan‚Äôs sovereign debt to negative because of the country‚Äôs debt
problems. The rating agency is of the opinion that the new government under
prime minister Yukio Hatoyama is not making enough effort to bring the country‚Äôs
debt problem under control and ward off the danger of deflation. Government
debt currently stands at 200% of GDP and is set to rise to 250%
in the next five years. This put an end to the yen‚Äôs recent rally.
This week, markets will also be trying to guess how long the
FOMC‚Äôs ‚Äúextended period‚ÄĚ actually is. Apparently the FOMC is becoming more and more convinced
that the upswing in the US, though weak, is self-supporting. Given substantial resource
slack, the majority of the committee members are still of the opinion that low interest rates are
warranted for an extended period. But this view seems to be gradually changing.
Thomas Hoenig of the Kansas City Fed, for instance, voted against the committee‚Äôs
decision to retain the phrase. In his view, given the significant improvement
in economic and financial conditions, maintaining monetary policy for a longer
period no longer seems justified. Thus a shift in US monetary policy is becoming more likely, particularly as the central bank has confirmed that
its special liquidity facilities are to expire shortly. In our view, there could be a first interest
rate step as early as the end of the second quarter. A lot will depend on next
week‚Äôs US labour market data. Job losses are widely expected to have
slowed down ‚Äď a crucial precondition for a monetary policy exit.
The upbeat economic data from Europe released
this week failed to have much impact. The ifo business climate improved for the eighth time in a row, and
the economic climate in Europe has continued to brighten up and is now only slightly below the
long-term average. In our opinion, the chances for an, albeit weak, but
sustained upswing in Europe have improved significantly.
Next week, apart from events in Greece, markets are likely to focus on the ECB governing council meeting.
After the last meeting, however, Jean- Claude Trichet had already announced
that the important decisions on further exit steps would probably be taken in
March. We are therefore not expecting the forthcoming meeting to provide much
impetus. The ECB governing council is not likely to change its stance on
helping Greece either.
Uwe Angenendt +49 69 718-3648
Grabbe / Klaus N√§fken
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