By Dean Popplewell
The collapse of the Greek government is not expected to have the same knock on contagion effect witnessed during the "darkest days" of the euro debt crisis two years ago. Back then and similar to today, the ECB pledged to save the EUR currency by any means. Any major contagion is likely to be met with policy support from Draghi and company. With potential ECB 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 - albeit to a lesser degree - 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 ten-year debt trades close to +2%, a long way from the +7% at the height of the debt and contagion crisis. Even with today’s Italian 10s auction results, despite some mixed results, the positive price action would say more than anything else – there is demand willing 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 E.U./ECB/troika agreement) and their 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 free-fall go around.
The EUR remains broadly steady outright (€1.2155) and off its two-year low (€1.2124), and this 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 EMU is far from over.
ECB’s price and lending issues
Spanish consumer price data this morning stresses 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 EU-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 strong even from a eurozone economy with significant economic growth. Do not be surprised that energy prices will be expected to take the bulk of the blame.
Euro Credit Improving
If it’s not price then it’s usually lending concerns that keep the ECB busy. Central bank data this morning suggests that the eurozone’s flow of credit is slowing improving. Lending to the private sector improved last month (M3 broadest measure +3.1% vs. +2.5%, m/m), but remains below year-over-year levels (-0.9%). Despite the improvement, euro’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 an inflation rate 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) at least 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.