Heading into the coming week, markets are riding a wave of optimism following an unexpectedly high level of job creation coming from the US. At the close on Friday, the Nasdaq composite index finished at its highest level for eleven years and the S&P 500 further advanced gains. The macroeconomic outlook for Europe, however, remains constrained by the still-outstanding Greek debt-swap deal, holding back risk appetite in many more volatile assets.
European market performance is likely going to focus on two key macroeconomic variables for the coming week; the first being the omnipresent spectre of the Greek PSI talks and the will-they-won't-they theme that has been dominating markets for much of the year so far. The twisted tale of the Greek debt-swap deal has exhibited more than its fair share of ups and downs, however many analysts have pencilled in a tentative final approval of a PSI package by this Friday. The second factor will be further commentary and optimism arising from the ECB's second LTRO auction. This operation is due at the end of the month, with many analysts expecting European banks to increase their uptake since the first auction following removed stigma and such widespread use. These planned liquidity measures have driven down the market cost of borrowing throughout Europe, shown by the steady decline in daily Euribor fixings for over a month, and arguably healed wounds caused by tougher credit markets. Many have, however, noted that these regular pumps of liquidity and cash are somewhat counterintuitive, and are a masked attempt to solve problems caused by extended easy credit with… easy credit. The market optimists can, though, continue to argue that these LTROs are successfully buying time for the Euro-area, but how long can this borrowed time last?
This Thursday sees the monthly setting of the ECB base rate, with a press conference following the announcement. It is likely that the ECB President Draghi will note recent strong performance, mainly in the form of PMI manufacturing and services indices from some of the core European countries, bucking the trend of recent doom-and-gloom figures forecasting stagnant economic performance measures. Markets are expecting little in the way of major policy changes from the conference ahead of the next LTRO, with the ECB confident in the measure following the success of the previous operation.
Activity from the BoE includes their respective base rate announcement (again, with no changes forecasted) as well as a touted third round of quantitative easing, pumping an additional GBP 50bln into the UK economy. Some observers have noted that the choice to go ahead with further QE is questionable following services data last week outperforming expectations in the UK, however the most realistic question on investors' minds is how much QE the BoE will commit to this week, rather than if they will commit at all.
Lastly, a Eurogroup Meeting scheduled to take place today has been delayed with a possible meeting occurring on Thursday. Topics likely to be discussed here include further Greek bailout measures and the state of Europe's other underperforming economies such as Portugal. It is worth remembering that sources reported results of the long-awaited Greek PSI negotiations were to be reported at this meeting today, so the delay in the ministers rendezvous only adds to uncertainty and lack of decision making which continues to be a dominant theme within Europe.
Sources: The Economist/FT-Link 1