Here’s a view of next week from our team’s weekly news planner:
Not unlike England’s performance at the Euro 2012 football tourament, EU summit expectations have been successfully lowered in advance by all concerned and so it will be hard to disappoint as a result!
The gnawing realization in markets is that the really game-changing steps by Germany on some form of debt pooling now look unlikely before next year’s general election there and so investors may have to hang on tight to what can get done in the meantime if the system is to hold together. Yet for all the understandable policy scepticism, there are a lot of big changes on the table — from banking union, more flexible budget-cutting programs, infrastructure growth pushes, a roadmap at least to euro bonds and a euro finance ministry and the launch of the ESM next month (barring a last-minute torpedo from the German constitutional court at least). It may be a little too easy to dismiss all that is happening just because there’s not going to be a grand instant fix ready for Monday. The ESM alone should have powerful stabilization powers for markets at least. What’s more, Merkel says ”over my dead body” to Euro bonds in one breath, and then “when conditions are right” in another. Assuming she’s referring to her political body, then even these may not be a million miles away.
But the saga has become as much about politics and personalities now as percentages and public opinion, and so you always have to factor in the chance of a major bust-up or row. Broad agreement itself, as a result, may be a relief for a bit come next week — at least until Thursday’s next Spanish debt auction!
For investors, all you can say is that there is an awful lot of negativity is built in already and there are many downside tail-risk hedges in place. These are not, as some suggest, in the currency market. For a whole host of good reasons, the euro exchange rate has never been and never will be a barometer of this crisis. If the euro has dipped ahead of this summit, it’s more to do with rising expectations of an ECB rate cut next week. Government debt markets remain the epicenter and are best gauge of the crisis. Maybe equities at the margin. So, with euro debt and global growth fears at such a high pitch, are there any positives that could shift positoning?
The summit and US 4th of July holiday aside, the start of Q3 next week will see attention shift back to the central banks, most notably the ECB on Thursday but also the Bank of England, Reserve Bank of Australia, Swedish Riksbank and National Bank of Poland. The consensus call on the ECB has now tilted to a rate cut. And inflation watchers everywhere will be mightily relieved by the recent sharp drop in commodity and energy prices, with Brent down up to 20 percent year-on-year. Disinflation, rather than deflation, is positive as it bolsters purchasing power and allows further monetary easing. What’s more, despite a horrible couple of months of incoming economic data, reports around the world have started to turn a bit more positive again in spots. For one, US housing – whose downturn triggered the whole credit crisis five years ago – is showing more signs of turning, or at least bottoming. Of course, US June payrolls next week will offer better clues to overall US economic health. And one eye maybe should be kept on the passing of the EBA deadline on Saturday to see if European banks in general become less conservative with their cash afterwards.