So nothing new from the EU leader’s dinner last night and to have expected anything more was very wishful thinking.
The usual platitudes, back slapping and above all the message that they want Greece to remain in the eurozone makes the message clearer than ever, that it’s very much down to the Greek people to decide whether their fate lies with the single currency or the drachma. The real decisions, on the introduction of a Eurobond or a more effective firewall, have been delayed once again to the next summit at the end of June, by which time it may be too late. If the Greek people don’t vote for a pro bailout party then the only other option for them is to leave. When it comes to it, however, the voters are still in favour of staying in and so when they are faced with an in out option they will likely end up have to reject the extreme parties. The only good thing to come out of a possible ‘Grexit’ will be that markets will no longer be riddled with uncertainty and will probably rally strongly should that become the clear course for them, however any relief rally in such an event may be short lived as the focus shifts to other countries.
Unfortunately, the euro saga is set to run and run and will probably serve to keep volatility high. That volatility was seen last night in the US session where the Dow rallied some 100 points in its final hour of trading and that recovery has filtered through to the European session this morning. The FTSE is higher by some 50 points at the open and considering the strength of the rally from the lows across the pond, which formed a very bullish candlestick, there might be some bulls tempted to push the markets higher from here. But as mentioned rallies might still be short lived as volatility remains high and you can’t deny the fact that investors are risk averse at the moment. A significant example of that was seen yesterday where German 2 year notes were sold giving a near to zero coupon and even this auction was well subscribed. Investors are willing to put their money in a safe haven such as German bonds which yield them absolutely nothing, but will at least almost guarantee they’ll get their money back.
Quite a bit of economic data out today and we’ve already had some mixed German and French manufacturing and services data, but the focus for the UK is the second reading of GDP which is expected to reaffirm the technical double dip recession. UK growth has disappointed for some time now and almost everyone has been reducing their forecasts for growth going forward. Until things improve on the continent then the banking sector is unlikely to be in a better position to fuel the economy. Another few quarters of a flat lining economy are unfortunately the most likely outcome, with a threat of even deeper recession if the eurozone really does implode.
Ahead of a meeting in Brussels where European officials were set to clash over how to tackle the situation in Greece and by extension decide the way forward, investors remained undoubtedly nervous. So much so that they pushed the shared currency 94 pips lower versus the dollar to 1.2585, even touching 1.2542 at some point, the lowest mark since July 2010.
Gold posted another decline, $6.52 to $1560.7 on the back of a continued flight into the safety of the US dollar, which put downward pressure on the whole commodities spectrum for that matter. As we mentioned in the previous report the yellow metal definitely lost some of its appeal as alternative asset. With inflation fears far away right now is it only the QE3 that could boost gold buying?
As if the contagion from Europe was not enough to scare energy investors, the US Department of Energy released its weekly oil inventories showing supply at a 22 year high. Consequently WTI crude prices plunged again, this time crossing under $90.00 to close $1.64 down for the day at $89.90. Reaching a fresh recent low at $89.29, last seen on Nov 1, is also testimony of the bearish sentiment in the energy sector.