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Week Ahead: market ‘checks & balances’ thwart political ambitions
Elections in France and Greece, as well as a decision on more QE in the UK, are among the big events we'll be watching next week.
Politics will again clash with brittle markets in the coming week, with uncertainty about the continued appetite for austerity when leaders are elected in Greece and France.
Amid concerns about whether French presidential favourite François Hollande will force a shift in eurozone policy – potentially leading the bloc to a more growth-oriented strategy – investors fear that bond markets could impose their desire for austerity either way.
Veteran French manager Jacques Chahine said that regardless of who runs France, markets will unleash an attack on the country’s sovereign debt, forcing a restructuring of public spending.
‘In reality, we are going to going to see Hollande elected, and we are very quickly going to see the impossibility to raise government spending,’ said Chahine, of J.Chahine Capital, who adds a that a downgrade of France’s debt is ‘very probable’ in the coming months.
Louis Gave of economic research unit Gavekal makes a similar point about the persuasive power of the bond markets. ‘President Hollande may soon have to confront the “checks and balances” of the market’, he wrote in a recent commentary. ‘If Hollande did not embrace the necessary reforms, France would very probably follow Italy and Spain and the market would impose the reforms anyway.’
The Greek election, also on Sunday 6 May, could prove even more problematic for eurozone stability, with potential difficulty in forming a coalition government strong enough to push through the reforms necessary to receive a bailout package from the EU and International Monetary Fund. 'It is important that Greece speedily gets a new government', emphasised Citigroup.
The first of two German state elections takes place on Sunday as well, paving the way for an eventual ‘grand coalition’ next year. Further ahead, an Irish referendum on the ‘fiscal compact’ hammered out by European leaders last year is due at the end of the month.
Still, if markets get through the coming weeks relatively unscathed then, with the French and Greek presidential elections behind them and some sense of what the new governments plan, investors will be able tick off two of the most dreaded events of 2012.
More QE in the UK
Thursday 10 May has long been pencilled in as the date when the Bank of England would sanction more quantitative easing (QE). This is when the last batch of the £325 billion so far allocated to the scheme – amid much controversy – will have been dished out.
As a quick reminder: the scheme is designed to boost the economy, or at least asset prices, but side-step the banks.
Influencing the nine-man monetary policy committee (MPC)’s decision will be inflation, which is falling, but not as fast they’d have hoped, proving ‘sticky’ in March when consumer prices inflation came in at a higher than expected 3.5%. One member of the committee, Adam Posen, who had consistently voted for more QE (which is inflationary), changed his call in April for this very reason.
Then there is the weak economy, as evinced by the official decline back into recession. But economists debate the credibility of these numbers – and more importantly how the MPC reads the state of the economy. They are, after all, dealing with conflicting figures.
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