Markets opened in Asia with mixed reactions to the events of last week and the rate cut by Chinese Central Bank. The Shanghai Composite Index and the Hang Seng closed in the negative, while the Nikkei was able to squeak out a 0.23% gain in the market. At the time of writing we have seen gold off over 1.47%, trading down to $1,560.70/oz. from its high in late January of $1,780/oz. West Texas Crude also continues to plummet, selling off a further 1.84% and currently trading at $94.36 a barrel this morning.
Where Will the Chips Fall?
Tensions continue to build in Europe as more countries consider the possibility of fighting the austerity measures placed against them in 2011. Greece has been at the forefront, but France’s new President-Elect Francois Hollande has also campaigned to fight austerity in his country, and seems to believe very strongly in establishing growth policies as a substitute. Raising the ante is Ireland, which has announced it will be holding a referendum vote on May 31 to determine whether or not to accept the EU treaty that aims to controls the nation’s annual deficits and longer-term debts.
Over the weekend Greek President Karolos Papoulias summoned his nation's four party leaders for further talks in an effort to establish a coalition government. The meetings appeared to be over before they began, as the left-leaning Syriza leader Alexis Tsipras refused to join the negotiations. Greece is currently looking at a 130 billion bailout package which is being provided by the European Union and the IMF, and the major issue facing the country is that, without further aid, they are set to run out of money as early as next month. If they do not have a government in place to negotiate the next aid package, we could see a Greek default, an exit from the euro zone, and potentially even a return to the drachma.
Meanwhile, leading the austerity charge has been German Chancellor Angela Merkel. Germany has been able to keep its economic engine chugging along while many of their neighbours struggle to balance their budgets and keep public debt to a sustainable level. Over the weekend Merkel’s Conservative Christian Democrats suffered a punishing defeat to the left-leaning Social Democrats in North Rhine-Westphalia, who won 38.9% of the popular vote. Interestingly, North Rhine-Westphalia has a larger population than the Netherlands and an economy the size of Turkey’s. Furthermore, and unbelievably, the Christian Democrats have held this seat since the Second World War, making this something of a wake-up call going into the German national elections next year.
This is going to be an interesting week for the Germans, as we are receiving their quarterly GDP tomorrow morning. The fourth-quarter GDP had slipped into negative territory with a 0.2% contraction. If Germany posts a second negative reading, they are going to be in a technical recession. The market is looking for a 0.1% growth target for the first quarter of 2012. If Germany were to fall into a recession this could reverberate throughout the rest of Europe and drive further risk aversion-trading.
China Growth, North American Data
For the third time in six months this morning, the People’s Bank of China cut the Reserve Ratio Requirement (RRR) by 50bps. This decrease in RRR reduces the amount of cash that banks have to set aside as reserves, and is ultimately aimed at helping to fuel growth in China. Chinese Premier Wen Jiabao seems to have shifted his support from fighting China’s inflation and containing growing property prices to focusing on economic growth. There are estimates that the previous RRR cut in February added 350-400 billion yuan ($63.4-72.8) to the Chinese economy.
The growth coming out of China is the lowest we have seen since 2009. Loans in China are down 17% from this time last year according to the Bank of China.
Data coming from North America is going to be lighter at the beginning of the week, and will likely largely be reacting to news coming from Asia and Europe. On Tuesday we are going to see the Consumer Price Index (CPI) and Retail Sales numbers from the US, and we are looking for the US to show further signs that their economy is coming back on track and printing positive numbers.
North of the 49th Parallel, we’ll see CPI numbers on Friday, which should help provide some guidance to the markets as to what Mark Carney and the Bank of Canada are going to do with interest rates. The jobs report that came from Canada on Friday showed that the best two months of job growth in Canada since the early 80s have not helped the market believe that the Bank of Canada is going to stand pat until 2013 with an interest rate increase.
Happy trading!
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