MacroScope

Market selloff – blip or new crisis?

A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York

A two-day summit of EU and Asian leaders, which was going to be most notable for a meeting between the heads of Russia and Ukraine, risks being overtaken by financial market tremors which have spread worldwide.

There’s a good case that markets, primed with a glut of new central bank money, had climbed to levels which the state of the economies that underpin them did not justify. With the Federal Reserve about to turn its money taps off, investors seem to have woken up to poor growth prospects in much of the world.

On the other hand, yesterday’s sell-off was sparked at least in part by some sub-par U.S. data and it’s hard to argue that prospects for the world’s largest economy have suddenly taken a turn for the worse.

For Europe – parts of it at least – this is dangerous. If the market rout continues it will hit already-fragile business and consumer confidence and curb spending and investment. The euro zone will be hoping its final September inflation figures, due this morning, are not revised down from a paltry 0.3 percent.

As tumbling stock markets took many of the headlines yesterday, Greece’s 10-year borrowing costs zoomed close to 8 percent – way above the level that would allow Athens to quit the bailout programme hated by its people and return to financing itself on the markets.

Greek confidence vote

A Greek and an EU flag flutter in front of the temple of the Parthenon during the takeover ceremony of the six-month rotation of Greece's EU Presidency in Athens

Greece’s ruling coalition will hold a confidence vote in parliament this evening in an effort to end speculation that the country may be facing snap elections early next year.

Prime Minister Antonis Samaras wants to use the vote to gain support for his candidate in a presidential vote. Under Greek law, parliament must be dissolved if a president cannot be elected. The radical leftist Syriza, which has a sizeable lead in opinion polls, has pledged to block Samaras’s pick.

Athens has begun talks with the EU and IMF inspectors on life after its bailout. The coalition is hoping an exit will rally Greeks fed up with years of austerity, but it faces a series of hurdles in pulling that off, including convincing EU/IMF lenders it can finance itself without problems.

Italian and Greek confidence votes

Greece's PM Samaras addresses the audience during the Economist Conference on "The big rethink for Europe, the big turning point for Greece" in Athens

You wait ages for a no-confidence vote then two come along on the same day. Neither are expected to cause governments to topple.

Greece’s ruling coalition will hold a confidence vote in parliament in an effort to end speculation that the country may be facing snap elections early next year.

Prime Minister Antonis Samaras wants to use the vote to gain support for his candidate in a presidential vote. Under Greek law, parliament must be dissolved if a president cannot be elected. The left-wing Syriza party, which has a sizeable lead in opinion polls, has pledged to block Samaras’s pick.

Just when you thought it was safe to get back in the water…

A worrying weekend for the euro zone.

Greece’s coalition government – the guarantor of the country’s bailout deal with its EU and IMF lenders – is down to a wafer-thin, three-seat majority in parliament after the Democratic Left walked out in protest at the shutdown of state broadcaster ERT.

Prime Minister Antonis Samaras insists his New Democracy can govern more effectively with just one partner – socialist PASOK – but the numbers look dicey, although it’s possible some independent lawmakers and even the Democratic Left could lend support on an ad hoc basis.

Samaras has ruled out early elections and says the bailout – without which default looms – will stay on track. If the government fell and elections were forced, the likely beneficiaries would include the anti-bailout leftist Syriza party which, if it got into government or formed part of one, really would upset the applecart.

G8 — plenty to worry about

The week kicks off with a G8 leaders’ summit in Northern Ireland. Syria will dominate the gathering and the British agenda on tax avoidance is likely to be long on rhetoric, short on binding specifics.

But for the economics file, this meeting could still yield big news. For a start, Japanese prime minister Abe is there – the man who has launched one of the most aggressive stimulus drives in history yet has already seen the yen climb back to the level it held before he started.

The financial backdrop could hardly be more volatile with emerging markets selling off dramatically since the Federal Reserve warned the pace of its dollar creation could be slowed.

Can Greek public opinion be turned?

So we’ve got the fresh Greek elections we expected and markets, despite the inevitability that we would get here, have reacted with some alarm. European stocks have shed  around 1 percent, and the harbour of German Bunds is pushing their futures price up in early trade. The Greeks will try to form a caretaker government today to see them through to elections expected on June 17.

The key question is whether the mainstream parties can mount a convincing campaign second time around, playing on the glaring contradiction in SYRIZA’s position (no to bailout, yes to the euro) and essentially turning the vote into a referendum on euro membership, which the overwhelming majority of Greeks still support. Don’t count on that. SYRIZA remains ahead in the polls.
To be able to pull it off, PASOK and New Democracy will need some help from Europe. There have already been hints from Brussels that if a pro-bailout government is formed, Athens could be given some leeway on its debt-cutting terms. But equally other voices are saying there is no more room for manoeuvre.

France’s Francois Hollande used his presidential debut to frame help for Greece within his push for a European growth strategy last night, saying he hoped that could also foster a return to prosperity there. He and Germany’s Angela Merkel are due in the United States for a G8 summit at the end of the week where doubtless they will come under heavy pressure to make sure Greece doesn’t bomb out of the euro zone or, if it does, that the effect is contained. Easier said than done. Given a Greek euro exit would probably require rapid concerted reaction from the EU, IMF (to shore up Spain?) and the world’s big central banks (remember the global monetary policy response after the collapse of Lehmans?), planning for that could well be bubbling below the surface at the G8.