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WEEK IN FOCUS - 14/05/12 - 18/05/12

At the introduction of the Euro on January 1st 2002, over a decade ago, it is highly unlikely that any policymaker could have predicted the fractured face of the European monetary union today. After much deliberation, markets see no relief from Greece as weekend discussions fail to provide a stable governing coalition in the Hellenic Republic. As such, it appears highly probable that Greece will be forced to undergo another round of elections in June and attempt to bring stability to a nation that is facing the precipice of yet more economic turbulence. The major political parties in the country; New Democracy, PASOK and now Syriza, are set to return to campaigning and markets will be looking out for any change in promises or policies as the leaders attempt to win over the disillusioned voters. On the German political front, Chancellor Merkel has not been spared from the movement against incumbent politicians as the CDU is defeated in the North Rhine-Westphalia parliamentary elections by the SPD. The loss provides further evidence of anti-austerity sentiment washing across the continent, placing Merkel under yet more pressure to deliver results from her fiscal commitments.

The continued strain across Europe will likely be reflected in the preliminary reading of Q1 Eurozone GDP, currently expected to show a 0.2% contraction on Tuesday. Markets also await the flash GDP figures from France and Germany this week, both expected to show minor growth at 0.1% and 0.2% respectively, highlighting the continued dependence on the core nations to prop up the rest of Europe. Key macro data from the US is also expected, with this week seeing CPI, retail sales and industrial production figures released throughout the week. However, the focus for the US will be the publication of the FOMC minutes on Thursday, where participants will be awaiting the motives behind their views on when to raise rates in the US. Elsewhere from central banks, the BoE are set to publish their quarterly report on Wednesday, and analysts currently expect an upward revision to their projections for inflation this year, justifying the MPC's recent decision to keep QE on hold as inflation remains sticky, despite the recent poor GDP data. Subsequently, Q1's disappointing growth print is expected to drag down the BoE's growth forecasts for 2012, prompting speculation of another wave of QE in the future.

In Asia, concern over China's economic slowdown remains high, leading the PBOC to cut their reserve requirement ratio for the third time in six months over the weekend in an attempt to inject funds into the national economy. The move comes after a disappointing string of money supply data last week, showing a sharp slowdown in lending and liquidity growth, raising global fears of upcoming credit constriction. The borrowing concerns are not limited to Asia, as the Euribor rate fixings rapidly decelerate their decline, with the latest three-month fix failing to show a fall on Friday for the first time since the ECB's LTRO actions.

In the equity markets, the steadfast recovery of US financials has also been called into question following last week's significantly large loss from JP Morgan, wiping considerable fractions off the share price of the US' largest banks. This week, shareholders will be awaiting any change in strategy from the sector as fears arise over the performance of the other heavyweights.