Markets remained bullish this week, helping the FTSE 100 gain 1% and clear the 5,700 mark despite growing uncertainty over Greece’s fiscal situation and Fitch’s downgrade of Portugal’s sovereign rating to exacerbate the European debt crisis.
The Footsie started the week in the negative amid renewed worries over the Greek debt crisis after President of the European Commission Jose Manuel Barroso openly challenged German Chancellor Angela Merkel, who repeatedly and adamantly expressed her belief that Greece did not need financial aid from the euro zone and would have to turn to the International Monetary Fund (NYSE:IMF) for assistance before asking the EU for help. Late last week, Barroso called on the euro zone states to agree on a bailout package for the troubled country, which is estimated to need to secure some €50 million this year or face a default. Merkel, who also insisted that Greece’s debt woes were not on the agenda of the upcoming EU summit in Brussels, was backed by a strong support of the German population, which, as public opinion polls showed, heavily opposed Germany’s participation in any bailout deal.
Barroso was supported by other euro zone states, notably France and Italy, however, French President Nicolas Sarkozy and Merkel met later in the week and agreed on a mechanism to provide financial aid for Greece with the participation of all 16 euro zone states and reportedly heavy involvement of the IMF. President of the European Central Bank (ECB) Jean-Claude Trichet muddied the outlook for a solution, warning against the IMF’s participation in a bailout deal for Greece.
The two-day summit, which kicked off on Thursday, did result in a solution as EU leaders agreed to loan up to €22 billion to Greece jointly with the IMF in the event that the country is unable to raise enough money in the market.
The agreement provided immediate relief to the euro, which hit ten month lows against the US dollar this week and has under heavy pressure from the unravelling European debt crisis for the past couple of months. The deal, however, did not improve the long-term outlook for Greece’s debt and the gains in the euro and European stock markets were limited.
Middle through the week, rating agency Fitch cut Portugal’s sovereign debt to AA with a negative outlook after warning of a possible downgrade if the country’s fiscal consolidation progresses at a slow pace.
Investors had to digest some mixed data in the beginning of the week when the Chicago Fed national activity index showed a decline from -0.04 to -0.64 in February.
On Tuesday, a US existing home sales update showed a 0.6% decline in February, which was balanced out by a decline in UK inflation from 3.5% to 3% reported on the same day.
All eyes were on Chancellor Alistair Darling’s Wednesday’s budget speech, which lifted housebuilders and banking stocks after Darling announced a two year suspension of stamp duty for first time buyers on houses worth up to £250,000 and said that part-nationalised banks Lloyds (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS) would have to dish out at least £94 billion in business loans in the fiscal 2010/11 with half of these funds going to medium and small businesses.
The Footsie made most of its gains on Thursday, buoyed by strong domestic and US economic data. A UK retail sales update showed a month on month growth of 2.1% following a 3.5% decline in February, while US initial jobless claims data revealed a steeper than expected decline of 14,000 in initial jobless claims last week to 442,000.
UK markets slumped on Friday following a disappointing US bond auction and US GDP data, which showed a downward revision of Q4 GDP growth from 5.9% to 5.6%. The negative update was balanced out by the University of Michigan consumer confidence index for March, which remained unchanged at 73.6, which a decline to 73 was expected.
The FTSE 100 and the Dow Jones Industrial Average, the broader S&P 500 index and the technology heavy NASDAQ composite are currently projected to open marginally higher on Monday.
Disclosure: The author holds no positions in the company