Economies and Europe remain recession-hit, but markets are paying less attention. There’s a growing confidence across the world that policy settings are now correct.
What a difference a year makes, with some help from the European Central Bank. It might be overconfidence, but a year after the third end-of-year crisis in the eurozone, the sense of impending doom and gloom has gone, replaced in some cases by very cautious optimism. That’s despite the eurozone economies and others, such as the UK and Scandinavia, slowing almost to a standstill or tumbling into recession for the second time in three years.
If the events of last week and the market reaction is any guide, the eurozone is losing its capacity to frighten the rest of the world. That’s despite the recession, Greece being on the verge of a third bailout, eurozone finance ministers not agreeing on a new deal for Greece (despite 11 hours of talks late last week, putting off a decision until tonight at the earliest), and the collapse of vital budget talks for the EU (after two days of very inconclusive talks).
Even a strong pro-independence vote from Catalans overnight won’t be enough to ruin the revival in Europe, tentative as it is. Tonight’s meeting of EZ finance ministers seems to hold few worries for markets that a year ago were quaking at every pronouncement from Spain, Italy and protest from Greece. The threat from the Greek elections has come and gone, Holland voted for centrist parties, rejecting right wingers, and in many countries the strong slash and burn policies of austerity-loving politicians has faded as voters have forced their leaders to change tack. That in turn has blunted the demands of bond holders and other big investors, who look certain to face more losses in the coming year in Greece (along with countries such as Germany).
A year on from the crisis of late 2011, the markets have ridden out the events of last week which would have previously seen currencies other than the US dollar weaken, share prices fall, gold prices tremble and rates on government bonds in many countries such as the US, Australia, Germany and the UK fall as worried investors sought safe havens for their money.
Go back to November 2011 and that’s what we were seeing: the Australian dollar dipping as low as 96.99 US cents (a year ago this week in fact) as worries grew the eurozone would be blown apart by a combination of Greece’s default and exit, damaging weak Italy and Spain and break the continent’s financial system and struggling banks. They were fraught times. The gathering crisis had seen the Reserve Bank cut interest rates here in November and ahead of the December meeting there were expectations of a second cut, a belief that became reality a year ago tomorrow week. The ASX’s 200 index was around 4050 and was staggering lower.
Twelve months on and the global financial system remains intact and a bit more solid. The feeling of crisis has eased (but still lurks in every twist in the Greek talks at the month), share prices are stronger, despite the current sell down which started in September. Commodity prices are a touch firmer, China is looking better and there’s a feeling the makings of a better year in 2013 are now being laid down. The Reserve Bank recognised the impact of the improvement in the minutes of the November 6 board meeting released last week.
Friday saw the Aussie dollar end at $US1.0460, up more than 7% in the past year, while the ASX is up nearly 400 points or 10% (and was up by around 15% in September before the recent sell down started). Australian 10-year bond yields rose back over 3.25% last week (the cash rate and closed at 3.30%) after dipping as low as 2.74% earlier this year in the great flight to quality. In fact that rise in bond rates here and around the world (with the exception of the US where they still remain low because of the so-called fiscal cliff) is that a sense of normality has returned to markets which are now less stressed.
Look at last week: the euro had its best week in nine months, despite the inconclusive talks between finance ministers and then the EU leaders. As well, European sharemarkets had their best week last week in 2012 so far with a gain of 4% and the first week where markets rose every day in a week for the first time since the middle of 2011.
But there are other signs of the enormous change in market sentiment: the Greek stockmarket is up more than 60% since mid year, despite the continuing deep recession and daily strains and crises about the latest round of cuts and finance. The market rose 7% last week alone, despite the failure of the talks on a new funding deal for the country. Yields on Spanish and Italian bonds have fallen and the sense of a funding crisis no longer stalks both countries. That’s despite renewed political tensions in both countries (which the Catalan vote overnight will add to). Spain seems to be slipping the net and on track to avoid a bailout.
Why? Because the ECB cut interest rates by 0.25% some 50 weeks ago and revealed the first of its Long Term Refinancing Operations for the EZ’s banks (actually for all the bank in Europe). A second round was revealed in February that took the total of three-year money lent to nearly $US1 trillion. Finally in August, ECB head Mario Draghi promised to do “what it takes” to steady the EZ and support countries like Spain and Italy. It took a couple of months for that statement to be believed, but markets now accept his commitment to the point where the split between the IMF and the EZ finance ministers on giving Greece more money and time to reform itself hasn’t damaged confidence or the value of the euro.
The failure of the ECB’s move was widely forecast, ruination and collapse were claimed to be about to crash over Europe and the rest of the world, but nothing happened. It could all come apart this week. But even so, it’s a timely reminder to all the local henny pennys in Australia: while times are tough and problems abound, shit doesn’t always happen when predicted.