Summit snowballs
31/01/2012
- Davos deliberates decisive eurozone action
- Portugal comes under spotlight as yields hit euro-era highs
- US equities retreat from bull market territory on GDP data
The world's political and business leaders gathered in Davos for their annual wintry jamboree - the World Economic Forum. The number of such gatherings since the summer does foster a nagging sense of summit fatigue and the event was characterised by the usual statements of great intent from politicians. As always, actions will speak louder than words.
Inevitably, eurozone debt reduction was the talk of the town. Discussions during the week and at a European finance ministers' meeting today have focused on plans to bolster the ‘firewall' put in place to bail out Greece and other struggling eurozone members. One option being considered is the consolidation of the two rescue funds already in place - the European Stability Mechanism and the European Financial Stability Facility - providing a combined war chest of €770 billion. Pressure is also increasing for public lenders to share the pain of a write-down in the value of Greek bonds. Private lenders have been asked to take a ‘haircut' of 50% and the European Central Bank may also be forced to do so to push through a badly needed debt reduction for Greece. Delays in reaching a final agreement have been weighing on the equity markets over the past few days.
As we have stated many times over the past few months, political agreement is the key requirement; a point stressed by both the Chancellor George Osborne and his US counterpart, Tim Geithner. Osborne challenged European leaders to "show us the colour of your money" before the UK was willing to contribute more to the IMF bailout pot, while Geithner opined that:
"Eurozone countries need to convince financial markets that they can respond
to any eventuality. All that is required is the political agreement."
After similar action taken by rival ratings agency Standard & Poor's earlier this month, Fitch added fuel to the fire on Friday by downgrading the ratings of six eurozone countries, including Italy and Spain. The news had little initial impact - Italy's 10-year bond yield finished the week below 6%, having been well above 7% earlier this year, while Spain's dipped below 5%. However, there was no respite for Portugal. Draconian austerity measures have failed to reduce its borrowing needs and concerns mounted that the country was heading for a similar fate to Greece, driving its 10-year bond yield to a euro-era high above 15%. Kasia Zatorska at Lombard Street Research commented: "The Portuguese economy is already in the downward debt spiral and once the Greeks have negotiated a reduction in their debt burden - most likely in a disorderly manner - the Portuguese will be tempted to do the same."
The key event of the week was the Federal Reserve's statement that US interest rates would remain "exceptionally low" until late 2014. It also made clear that further asset purchases to boost the economy had not been ruled out. This dovish stance helped counter lingering worries about the eurozone debt crisis and pushed the S&P 500 Index into bull market territory, defined as a 20% rise from the cyclical low it reached last October.
Amongst those announcing fourth-quarter earnings, Apple confirmed a bumper set of results and briefly became the largest US company by market capitalisation as its shares surged 6% on Tuesday. Indeed on Wednesday, turnover in the company's shares was $15.5 billion, compared with $5.2 billion total turnover in the FTSE 100 Index. However, Wall Street failed to maintain the momentum as disappointing US housing and gross domestic product data backed up the Fed's cautious tone. The US economy grew at an annualised rate of 2.8% in the final quarter of 2011; the best showing since early 2010 and stronger than the 1.8% recorded in the third quarter, but short of the 3% most forecasters had expected. The figures confirmed that, despite ambitions to move the US economy away from a reliance on consumers, the current recovery remains highly dependent on their spending, which still accounts for two-thirds of GDP.
From the aforementioned Davos summit, Timothy Geithner, the US Treasury secretary, insisted that the US economy was "in better shape than we could have hoped for", and added that he expected the economy to grow between 2 and 3% this year. The S&P 500 Index ended the week marginally down, by 0.08%, although still on track for its best ever January.
