Forex Market Commentaries - No End In Sight Even After Greek Debt Swap

The Suffering In Greece Won't Vanish Once The Ink Dries On The Swap Deal

Feb 1 • Market Commentaries • 1712 Views • No Comments

The highest proportion of European companies on record are missing profit estimates despite the region’s stocks post their best start to a year since 1998. Market bulls believe that the Stoxx 600 will extend this year’s four percent gain as the region’s stocks are still cheap and efforts by the European Central Bank to boost lending will aid liquidity. However, the contrarian view is that the rally will fade as analysts’ 2011 earnings projections are far too positive even after a 9 percent cut.

The Stoxx 600 had rallied 4 percent in January as of early this morning, the best start to a year since 1998. The measure has now advanced 20 percent from its Sept. 22 low through Jan. 26, entering arguably the second secular bull market inside a year. The surge in stocks is outpacing earnings prospects as Spain’s economy shrinks and borrowing costs in Portugal climbed to a euro-era record.

Pain Will Still Reign In Greece Despite Agreements On A Debt Swap
Debt-laden Greece and lenders must focus less on deficit reduction and more on reform as there are limits to what society can tolerate, a senior IMF official said on Wednesday. More reforms and slower deficit reduction would be a major policy shift compared with the country’s first 110-billion euro bailout. That relied heavily on tax increases and less on spending cuts which some economists and commentators now blame for the social unrest and the country’s worst post-war recession.

Greece has been consistently missing its deficit targets. Its budget shortfall is expected to have narrowed slightly last year to 9.6 percent of GDP from 10.6 percent in 2010.

Poul Thomsen, the head of the IMF’s inspection team for Greece, said in an interview with newspaper Kathimerini;

We will have to slow down a little as far as fiscal adjustment is concerned and move faster much faster with implementing reforms, Greece must surely continue reducing its budget deficit, but society and political support have their limits and we’d like to make sure that we strike the right balance between fiscal adjustment and reforms. Talks about the program will be completed very soon, it is a matter of days. We need assurances that whoever is in power after the election and reasonably wishes to make some changes in economic policy will be in line with the targets and the basic framework of the agreement.

The minimum wage may have to be lowered and holiday bonuses cut to make Greece’s firms more competitive, Thomsen stated. Greece may also have to fire civil servants,

Eurozone Manufacturing Decline
Euro-area gross domestic product will possibly contract by 0.5 percent in 2012 after growth of 1.5 percent last year according to projections from the IMF and World Bank. An index of executive and consumer confidence in the region’s economic outlook improved less than forecast in January, according to data released by the European Commission yesterday.

Euro zone manufacturing activity declined for the sixth month in series in January, a slight upturn in Germany failed to offset the contraction in the bloc’s smaller economies, a survey showed on Wednesday. Euro zone output did increase, for the first time since July, but new order levels continued to decline across the region.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) rose to 48.8 last month from December’s 46.9, (revised up from a flash reading of 48.7), recording its sixth month below the 50 mark – dividing growth from contraction.

Chris Williamson at data compiler Markit.

 

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The concern is that new orders have yet to return to growth, even in Germany, suggesting that companies will be reluctant to expand capacity and take on more staff until signs of stronger demand have appeared.

The PMI’s new orders index, at 46.5, was above December’s 43.5 but still marked a contraction for an consecutive eight months. Earlier data from Germany, Europe’s largest economy, showed its manufacturing sector expanded for the first time since September. In France the index has been below 50 since July and Spanish factories reduced activity for the ninth straight month while Italy’s cut back for the sixth month running. Greece and Ireland also witnessed contraction.

Market Overview
The Stoxx 600 rose 0.4 percent to 255.5 at 8:00 a.m. in London. The benchmark gauge rallied 4 percent last month, the biggest January gain since 1998 as the U.S. economy maintained its recovery and speculation grew that European policy makers will contain the region’s debt crisis. Standard & Poor’s 500 Index futures were little changed, while the MSCI Asia Pacific Index lost 0.2 percent.

Market snapshot at 10:10 am GMT (UK time)

The Asian Pacific indices were mainly flat or finished in negative territory in the overnight/early morning session. The Nikkei closed up 0.08%, the Hang Seng closed down 0.28 whilst the CSI closed down 1.43% despite data being published suggesting the Chinese economy will avoid a ‘hard landing’. The ASX 200 closed down 0.87%.

European bourse indices have risen very sharply in the mid morning hours of the morning session. With plenty of price action evident on the major currencies, particularly euro strength versus the greenback and the commodity currency pairs versus the dollar. The STOXX 50 is up 1.84%, the FTSE is up 1.50%, the CAC is up 1.74% and the DAX up 1.98%. The Italian index the MIB is up over two percent, currently up 2.15%. Ice Brent crude is up $0.77 a barrel whilst Comex gold is up $7.20 an ounce. The SPX equity index future is currently up 0.62%.

Forex Spot – Lite
The dollar has weakened for the first time in three days versus the euro as European equities jumped sharply rose. The greenback has fallen versus 13 of its 16 major peers. The euro was little changed versus the yen before Portugal sells bills amidst heightened concerns that the nation will require more aid. The Swiss franc touched its strongest level in four-months versus the euro, approaching the central’s bank’s ceiling. The 17-nation currency climbed 0.42% percent to $1.3132 at 10:10 a.m. London time. The dollar weakened 0.3 percent to 76.08 yen, while the euro traded at 99.92 yen.

The franc was little changed at 1.2039 per euro after earlier appreciating to 1.20319, the strongest since Sept. 19th, which was two weeks after Switzerland’s central bank imposed a 1.20 ‘cap’ on the currency’s appreciation.

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