Global financial market is probably heading for another eventful week, as Monday will be day one after Greece election. Leaders from powerful G20 nations will be busy in a 2-day meeting to discuss global economy and some of the political events around the globe, but European crisis will surely dominate the discussion. Fed’s FOMC meeting this week is another important event.
Sunday’s Greece election was a kind of referendum that if Greece wants to stay in the Euro-zone or not and is setting a future direction for the region.
G-20 meeting is an important event of the week as leaders of major developed/emerging economies will have serious discussion about the ongoing unending financial crisis. I will not be surprised to see sift in their stance with more compromising attitude towards austerity after the European election trend. The G-20 meeting communiqué could declare that leaders are in agreement that growth is essential and austerity is unavoidable.
Talking of growth and jobs in the Euro-zone region could help to taper down the public sentiment and ease tension that may provide temporarily relief, though German representation may show their displeasure, as its economy will have to pay high price for the compromising approach.
However, keeping in view the developments in Europe this week, I am sure that there are some contingency plans in the pipeline and the European and Global policy makers along with IMF must be prepared to counter any unusual situation with a coordinated effort and act in a very similar manner like they did in Japan soon after the Tsunami.
I would once again like to emphasize that the world is facing structural problem/imbalances and liquidity is not the real issues. So far Trillions of cash money has been flooded that may have helped banks faced with capitalization problem to show healthier banks balance sheet after the injection of funds due to this accounting adjustments.
The structural problem is caused due to excessive risk taken on derivatives, cross border risky transactions, quality of financing, printing of money and more importantly ECB independence should be questioned for violating/breaching its own rule for allowing lending to junk grade, for purchasing bonds directly from banks instead of buying from the secondary market, for allowing assistance to governments to finance deficit.
Quantitative easing is blessing for the speculators and the large investors such as hedge funds, portfolio managers and Sovereign Wealth Funds because injections of funds enable them to obtain credit facility from their rouge banks that goes unchecked.
So why don’t the G-20 leaders and financial managers discuss and tell the world that it is not the liquidity but the structural problem that needs to be addressed/corrected and what measure is being taken to correct/address the real problem? Providing funds at cheaper interest rates is a temporary solution to reduce borrower’s burden as it is easier to service debt, but simultaneously the lender is at huge risk, as there is no plan made available to return the funds on maturity, which is mostly and likely to be rolled over and may never ever be possible to settle the due to the humongous size of debt.
Meanwhile, during the week market was dominated by European events as major focus was towards Spain due to banking problems, which kept European bond prices under pressure, Spanish 10-year bond yield surged to hit 7 pct for the 1st time to close at 6.92 pct, which is extremely worrisome factor for the country’s politician and its leadership, as such a high interest rate is not affordable for any nation laden with high debt, high deficit and with high rate of unemployment.
US economic Data continued to paint worrisome picture, as economic numbers released during last 4-weeks by US data center showed no respite. Fed will be meeting on June 19-20 to discuss and announce its monetary policy.
Despite weak labor market my view remains unchanged “Operation Twist” will be extended as there is no need to hurry for QE3, the timing is not appropriate and quantitative easing does not guarantee economic recovery. Another factor that could hinder QE3 is the negative developments in the Euro-zone, as the risk is that possible worsening of economic condition could have spillover effect on the US economy that could begin by hitting its banking system. In any such situation FED may have to extend/increase swap facility as it did earlier, which is more effective tool.
So I am expecting FED to be choosy with its words and the language could probably differ this time, which could be something such as all effort will be made to protect the economy, FED is prepared to counter any eventualities, etc.
On Monday, there no major economic announcement, but market is faced with a new day/situation after Greece election. On Tuesday, G-20 announcement is expected, as on the same day market will watch UK Consumer Price Index and Retail Price Index and later German ZEW economic sentiment will be keenly watched that provides economic outlook for next 6-month, ZEW reading is complied with the help of over 350 German analyst and institutional investors. US session will begin with data pertaining to US building permit and housing start. FED FOMC 2-day gathering is on the same day. On Wednesday, there are couples of important European and UK data, but all eyes will be on FED monetary policy statement and press conference. On Thursday, German and European Purchasing Managers Index will give direction about the business condition in the manufacturing sector, which is large component of GDP and on Friday German IFO business climate is an important data, but European leader’s Special Summit may capture the headings as they may discuss Greece after election, Spain’s banking woes and Italy that could be next European issue.