- Greek contagion contained
- Single currency broadly unchanged
- Spanish disinflation remains an issue
- Euro credit shows some improvement
The collapse of the Greek government is not expected to have the same knock-on contagion effect witnessed during the ‘darkest days’ of the European debt crisis two years ago. Back then and similar to today, the European Central Bank (ECB) pledged to save the EUR currency by any means necessary. Any major contagion is likely to be met with policy support from ECB President Mario Draghi and company. With potential ECB quantitative easing (QE) on the immediate horizon, the markets believe that this is a Greek problem, despite the expected peppering of future “Grexit” talk.
Greek Assets Punished
Investors’ immediate reaction has seen Greek equities and bonds plunge, while other periphery markets (Italy, Spain, and Portugal) are rocked as conservative funds continue to flow into German Bunds (hovering around record high prices) and gold (+0.6% to $1,188). Currently, there is no panic even from Europe’s second-most indebted nation, Italy. Its 10-year debt trades close to +2%; a long way from the +7% at the height of the debt and contagion crisis. Even today’s Italian 10’s auction results, despite some mixed returns, suggests via the positive price action that there is demand to pay and support some record-low yields for various tranches.
Nevertheless, Greece’s failed presidential vote should be capable of creating a bigger element of uncertainty once the markets are back to being fully functional after the seasonal holidays. What the dealers and investors will be watching mostly in Greece will be the rise of the Syriza party (strong opponents of the European Union, the ECB, and the troika agreement) and its potential influence on like-minded parties throughout the eurozone. Market psychology should eventually support a greater risk-off mood just on event risk outcome, but nothing compared to the last freefall go-around.
The EUR remains broadly steady outright (€1.2155) and off its two-year low (€1.2124) despite single currency bears calling for a €1.20 print backed by the uncertainty surrounding Greece. It seems that the market does not have the momentum to follow through with conviction. Perhaps it requires greater market participation and an ECB QE announcement to up the immediate EUR negative ante. The situation in Greece highlights the view that the crisis in the Economic and Monetary Union is far from over.
ECB’s Price and Lending Issues
Spanish consumer-price index (CPI) data out this morning highlights the continuation of the “disinflation” trend within the eurozone. The December reading surprised on the downside with a -1.1% year-over-year drop both under the E.U.-harmonized CPI calculation and its own domestic CPI estimate. The result is now the weakest on record, firmly beating the respective -0.5% and -0.4% print from November. This is strong proof for the ECB that deflationary problems remain prominent even from a eurozone economy with significant growth. Do not be surprised if energy prices take the bulk of the blame.
Euro Credit Improving
If it’s not price then it’s usually lending concerns that keeps the ECB busy. Central bank data this morning suggests that the eurozone’s flow of credit is slowly improving. Lending to the private sector improved last month (M3 broadest measure +3.1% versus +2.5%, month-over-month), but remains below year-over-year levels (-0.9%). Despite the improvement, Europe’s M3 value remains well-below the ECB’s “reference value” of +4.5% that Draghi and company consider consistent with their goal of achieving and maintaining inflation of just under +2%. Annual eurozone inflation was +0.3% last month, and with the plunge in energy prices, this number could turn negative early next year. Despite the negativity, the ECB can take some heart that stimulus measures undertaken during the summer (cheaper bank loans, record low interest rates, and the purchase of covered bonds) seem to be having an impact, albeit a slow one.
None of today’s data should change market opinion on “when, not if” the ECB will start QE.