Risk assets surge as Greek austerity measures subdue Eurozone fears
05/Jul/2011 • Currency Updates•
Risk assets rallied strongly last week, buoyed by the apparent success of European Union officialdom in delaying – at least temporarily – a Greek sovereign default, as well as by a slightly better tone in macroeconomic data out of the United States. The reversal in asset prices was quite violent, as equities recovered in one week nearly half of their losses of the past 3 months, and government bond yields retraced about one-third of their drop in yield over the same period. Although clearly quarter-end rebalancing by asset managers had a significant role in last week’s moves, there was a clear change in investor psychology. Going forward, as Greece recedes (temporarily) form the headlines, we expect the focus to switch to the sustainability of the US recovery and Chinese overheating.
Revisions to first-quarter growth figures in the UK provided further confirmation of the parlous state of consumer demand. Household spending was revised to a 0.6% fall, the largest since the worst times of the 2009 crisis. While net exports were revised up and offset the drop in consumer demand, there is no mistaking the fragility of the UK recovery, and several strategists pushed back their predictions for Bank of England hikes well into 2012. Unsurprisingly, sterling lagged against the common currency all week, though it managed to end up a bit over 0.5% against the dollar while dropping 1.5% against the surging euro.
The common currency was buoyed by the passage of austerity measures by the Greek parliament, a sine qua non condition for receiving further bailout monies, and also by the apparent agreement of French and German banks to participate on a complex French-devised scheme whereby creditors would roll over part of their Greek bonds. While it was not yet clear how much “private sector” participation had been obtained by European officials, it is expected that Greece will recede somewhat from the headlines for the time being, and markets celebrated by pushing the euro up against most G10 currencies to end the week up over 2% against the US dollar. Longer term, the slowdown in Euro-wide economic data is hitting the stricken peripheral economies harder, thus widening even further the chasm between the strong core and the sputtering periphery; therefore, it is not clear how long the EUR can hold on at these lofty levels.
The return of risk appetite on news surrounding the second Greek bailout overshadowed the tentative upturn in US macroeconomic surprises and drove the dollar sharply lower. It must be admitted that the signs of a growth spurt in the US are few and far between. While the housing sector showed signs of stabilization, both in terms of price and sales, the personal income numbers for the month of May showed a second consecutive decrease in real terms. On the other hand, the ISM manufacturing numbers on Friday surprised clearly to the upside. It appears that a dichotomy between a healthy export-driven manufacturing sector and a sickly consumer demand picture is emerging in the US, much like the UK. Given the general outperformance of risk assets, however, it is not surprising that the dollar lost 1.5% in trade-weighted terms.