In what has become an extraordinarily quiet final period of 2011, there have been a number of developments that will leave their mark on financial markets for a long time to come.
The latest development from the Eurozone could well have been parodied in a Monty Python sketch had it occurred in a different era. A number of headlines will read of the disappointment of the EU’s attempt to bailout the Eurozone via the International Monetary Fund, due to the fact that it fell considerably short of the EUR200 billion target that had been exclaimed at the EU summit. In addition to the fact that the total amount fell 25 percent, or EUR50 billion short of target, EUR38.34 billion will come from Italy and Spain – the likely predominant recipients!
Just like that
Eurozone finance ministers, faced with slumping domestic demand and worrying growth forecasts that are being put further under pressure by the continuing national government austerity, would arguably be looking to the European Central Bank to monetise the debt or print money if they were not part of a diverse economic and monetary union. The Eurozone however and the ECB are unable to do this without an amendment to article 123 of the treaty. So far the EU Finance Ministers have looked at several complex and creative illusions to give the markets the comfort of monetary support. In reality, however, the ‘illusions’ of the Eurozone have been akin to those of comedian Tommy Cooper.
Chinese whispers
Overnight the Reserve Bank of Australia, delivered minutes from the December meeting, where it cut the benchmark rate by 25 basis points as expected. The minutes were perhaps slightly less dovish than the market could have expected, given the week global macroeconomic backdrop, highlighting solid Asian growth, continuing higher than expected investment into the mining sector and stronger domestic data. Moving into 2012 however, there are a number of question marks over the sustainability of the Chinese economic miracle -recently concerning house price data, which is just one small example.
A sterling performance
I will save my predictions for 2012, until after the malaise of the year-end trading markets – save it to say that I very strongly believe that 2012 will be a year of a number of significant opportunities. Commentators were very quick to brush off the jump in consumer confidence in the UK overnight. This is part of a broader dynamic that will probably see GBP outperform considerably in 2012. Apathy towards the bright spots of the UK recovery story will add to the momentum as the reality of the economic differentiation and relative value story gains throughout the year. More in 2012!
For the rest of the week apathy and a lack of interest (from a market that has been burnt by a number of negative shocks and sharp corrections) to take on any new risk will probably lead to a quiet end to 2011. If there is a risk however it is possibly that corporate UK has been expecting GBP to reach lower levels to hedge, and therefore GBP could end the year on the front foot.
Neil Staines
SAXO BANK