Reuters blog archive
By Neil Unmack and Fiona Maharg-Bravo
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
The euro zone periphery trade is running out of gas. Investors keen on a recovery story have been piling into assets in Spain, Italy, Portugal and Greece for over 18 months now. But some periphery assets are looking expensive. Further gains need two tricky conditions to be satisfied.
The bull run dates back to August 2012 with Mario Draghi’s claim he would do whatever it took to preserve Europe’s currency union. This year, Italian and Portuguese equity indexes are up 10 and 14 percent. The emerging market rout has dented Spanish stocks, but Madrid’s IBEX 35 is still up 22 percent since Jan. 1. Greek bank Piraeus just sold 500 million euros of bonds at a yield of just 5 percent amid huge demand, while shares in Italian lenders have also strongly rebounded.
The confidence reflects the euro zone’s progress in addressing its problems. Banks are raising capital, funding costs have fallen, and the economy is emerging from recession. The exodus from peripheral assets during the financial crisis has not yet fully reversed, suggesting prices could rise further. Global equity funds allocated 1.4 percent of their assets to Spain in January, still down from 1.8 percent in 2008, according to EPFR data. Some assets still seem good value in historical terms. Italian stocks trade on a forward multiple of 13 times next year’s earnings, according to Datastream, below their 20-year average.
Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.
S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.
Francois Hollande managed to bat off questions about his private life (how successful he is in holding that line depends on the attitude of the French media which yesterday was nothing but respectful) and focus instead on a blizzard of economic reforms.
Skating past the French president's call for an Airbus-style Franco-German energy company which left everyone including the Germans bemused, there was some real meat.
The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.
The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.
Nonetheless, the European Central Bank is likely to sit tight at its policy meeting today. The Bank of England’s rate setters are also meeting but facing a very different set of problems.
U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.
Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.
from Global Investing:
Last year was not the best for mergers in emerging markets, according to Thomson Reuters data, which shows mergers & acquisition activity down 4.6 percent from 2012 to $675.2 billion. The number of deals fell even more - by 11.3 percent to 12,748.
The drop-off in emerging M&A activity mirrors a 5 percent fall in the benchmark MSCI emerging stocks index last year, with investors more fearful about the emerging market growth outlook. But unlike stock market performance, emerging market deal activity outstripped the global total, which was down 6 percent from 2012 levels.
Any sense of euphoria EU leaders felt about agreeing a plan to underpin Europe’s banks – which should have been muted anyway – may be tempered by S&P’s decision to cut the bloc’s credit rating to AA+ from AAA.
In global terms that’s still rock solid but the rationale – flagging “rising risks to the support of the EU from some member states” has some resonance. On the upside, the agency affirmed its rating of Ireland following its bailout exit and kept its outlook positive. Presumably, S&P is clearing the decks before Christmas because it also reaffirmed the UK’s top notch AAA rating, and reaffirmed South Africa too.
A day after she was sworn in for a third term and a day before she attends an EU summit in Brussels, Chancellor Angela Merkel delivers a speech in the Bundestag lower house. She will then head to Paris in the evening for a meeting with French President Francois Hollande. That bilateral could be the moment that the seal is set on banking union, in time for the Thursday/Friday EU leaders summit.
In parallel, the bloc’s 28 finance ministers will meet in Brussels to try and finalise a common position on the detail. "For the acceptance of the euro on financial markets, the banking union is very important," Merkel said on Tuesday.
No sign of tensions calming on the streets of Kiev, in fact today we could have a new flashpoint.
Prime Minister Mykola Azarov's cabinet is holding its weekly meeting in the government building which protesters have blockaded since Monday, paving the way for a possible showdown.