Week End Blog – Greece falters, but Europe persists

This week, markets were made clear that Syriza, the convincing winner of the Greek elections, means business. Syriza has taken a hard stance towards Europe, at least for now, which unsettled markets a bit. Of course, the consequences were best felt in Greece. The 3-year government bond yield almost doubled, reflecting a rising probability of an ‘accidental grexit.’

But the real damage was done to Greek banks, which fell by almost 27% on Wednesday alone. And while European officials ‘confirmed’ that Greek banks should be able to survive, the increasing size of deposit outflows can’t be ignored, either.

Perhaps a little unfortunate in his timing, Robert Shiller stated, one day before the massive sell off, that the price of Greek stocks is ‘below anything I’ve seen in the U.S. and suggests a spectacular investment.’

But, where Greece seems to falter, the Eurozone as a whole showed resilience. Spain being a good example. The country’s Q4 GDP growth equaled an impressive 0.7%. This translates to a YoY GDP growth of 2.0%, the highest since 2008!

Friday proved to be a cheerful day for the Eurozone. Next to the Spanish GDP number, Italian unemployment fell by the most in 8(!) years and French consumer spending came in way above expectations.

Earlier in the week, German consumer confidence reached the highest level on record. Who says Europe is not alive?

The other major risk for the Eurozone, deflation, has not faded, however. Reported inflation levels are below expectations across the board. This week Germany joined the countries with a negative inflation rate. It was the first time since 2009 that German consumer prices fell YoY.

Let’s move over to the U.S. In a rather boring FOMC statement, without a press conference, the Fed revised its inflation expectations downwards, but struck a more bullish tone on the economy. Paradoxically, both interest and stock markets fell.

This raises the question if markets don’t believe the Fed or if they doubt the economic outlook. Meanwhile, inflation expectations are down to multi-year lows, which make it pretty complex for the Fed.

That last view might be given a bit more weight, as U.S. GDP growth for the final quarter of 2014 came in below expectations. While consumer spending looked very healthy, business and government spending disappointed somewhat.

In China, regulators are having another go at curbing margin lending. After the first attempt, when Chinese stocks initially plunged 7%, things were quickly reversed. It seems likely that the Chinese government will go for more thorough restrictions this time.

Chinese profits aren’t looking that healthy, either. Earnings of industrial companies fell 8% compared to a year ago.

After a couple of weeks of relative calm, things got ugly again in the Ukraine as violence flared up. Also, after a short pause, oil prices have started to come down again, closely followed by the Russian ruble.

With the ongoing pressure on the ruble it was quite a surprise to see the Russian central bank lower(!) the short-term interest rate. Is this a sign of strength or recklessness?

Meanwhile, Russian consumers are hurrying to get rid of their rubles. Real (after inflation) retail sales rose more than 5% from a year ago, the most in than two years. This would have been great news under normal circumstances, but now makes you wonder, instead.

I will end this week end blog with two impressive statistics. The first is, that despite the mediocre growth outlook, there’s still one tiny economy that will grow more than 10% this year. Congratulations Papua New Guinea!

Second, the market cap of Apple. After a mind-boggling quarter, Apple’s market cap almost matches that of the whole Spanish stock market, including companies like BBVA and Telefonica. The sheer size of Apple is just incredible.

You have reached the end of this Week End Blog. Thanks for reading and enjoy your weekend!


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