Angela Merkel seems intent on ignoring the markets whilst dealing with the Euro zone debt crisis. Last week, at a meeting between Germany and France both leaders defied the markets idea of a common Euro bond, which led to dramatic drops in the world’s stock markets and Euro weakness. Then yesterday Angela Merkel announced that ‘politics cannot and will not simply follow the markets’. Therefore markets calls to issue a Euro bond with higher liquidity and lower yields for the Euro zones most indebted countries have been effectively ruled out. The German finance minister Wolfgang Schaeuble also ruled out any Euro bond, and believed that the narrow trading range of the Euro against the dollar showed that the markets indeed had confidence in the Euro. He also stated that the decrease in German GDP was a small blip and that the German economy was still in excellent condition. In Germany, it is believed that the only way to tackle the Euro zone crisis is through austerity, however, this is easier for a country like Germany whose borrowing costs have dropped during the crisis and for whom Euro is undervalued. On the other hand in Spain where Youth unemployment is close to 50%, austerity measures are not quite as easy to implement. Indeed it must appear to some Euro zone states that Germany enjoys all the benefits of the Euro, whilst they must take on most of the hardship which the Euro has created. Perhaps it will take the default of Greece, which the S&P believes will happen later this year, for Germany to offer further help to the periphery after its banks have been affected by any such default.
In the UK there was some good news on Friday where rising revenues showed that public sector borrowing was on track to meet its fiscal targets for 2010/11. Markets have also been lifted by the news this morning that the War in Libya is close to an end, which leads to the hope of a further drop in oil prices. The rally in stocks looks to have fed through to currency markets with euro-dollar regaining $1.44 this morning. The single currency also made headway against sterling, with the cross rising from 87p to test £0.8840. Euro-Swiss is hovering over CHF1.13, but there has been little reaction to a statement by the Swiss President that the Swiss franc was ‘clearly overvalued’ and that ‘energetic intervention’ was necessary.
Posted in Daily Market News on May 30 2014