EU Economic Update – 15 December 2014

A shoddy performance from developed market equities as risk returns to the table

Dominating the week was a return to the headlines for Greece, with the nation’s Prime Minister forcing a Presidential election two months early in the face of a ruling by European finance ministers that the country has not done enough to secure the final tranche of bailout funds. A final tranche which will have enabled it to exit the contentious bailout program.

Instead the Greek government is now in a position where it is forced to ram through another round of austerity measures ahead of festive holidays. The news was immediately met by protests in Athens and was the key catalyst behind market unease throughout the week.

This of course led to a certain degree of upheaval and uncertainty across markets, with most indices closing the week at least 3% lower. The FTSE 100 lost close to 6% over the period while the Dow Jones in the US closed down 3.5%. European markets were a mixed bag with the CAC 40 in France down by 6.8% while the DAX in Germany capped losses at 4.7%.

In addition to political turmoil in Greece, demonstrations also gathered pace in Italy during week when thousands of protesters hit the streets once again in order to protest new laws which, among other things, strip away employment rights for workers. This underlines our view that political risk is a fast emerging, and significant, theme for investors in European equity markets.

Lower oil prices and poor economic data from China were just some of a number of additional factors to have depressed equity markets throughout the week. This was as Brent crude fell to another five year low at $60.49 per barrel, dragging the oil majors with it, while both industrial production and inflation data from China came notably short of the mark.

Chinese inflation fell once more, down from 1.6% to 1.4% throughout November while industrial production also fell much further than expected, with actual expansion falling to 7.2% against a projected fall from 7.7% down to 7.6%.

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European data remains uninspiring ahead of an important week for the continent

At the opening of what could be described as a critical week for the continent’s future, European economic data remains uninspiring.

In detail, last week’s French payrolls and industrial production numbers came far short of the mark, while the CPI inflation barometer also underwhelmed when it fell into contraction territory. The week ahead sees both manufacturing and services PMI’s due from Europe’s second largest economy, with mixed forecasts already in place for both.

Concurrent with the French releases, investors will also receive another glimpse of German economic performance so far into Q4, when the same PMI surveys are released for the bloc’s largest economy.

Further from here, the German IFO Business survey and final inflation numbers for November will also help to write the next chapter in the EU economic story for December, and therefore; the saga of continental monetary policy.

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Looking to the week ahead in Europe

Despite the importance of the economic releases due from Europe in the coming days, the headline act for the week remains a presidential vote in the Greek Parliament. This is as the outcome could determine the trajectory of financial asset prices throughout the remainder of December and well into January.

In short, the potential for a so called “Santa Rally” relies entirely upon the decision due to emerge from Greece on Wednesday.

Should Greek parliamentarians prove ineffective in their efforts to reach an agreement on a suitable presidential candidate then a date would be set for a second vote, most likely in January, which could lead to a rapid build up of uncertainty and unease among investors across the globe.

The upshot of a failed vote is that if after three rounds of voting, the parliament is still unable to elect a president, parliament would be automatically dissolved and a round of national elections would be called.

The sting in the tail here is that current opinion polls suggest the anit-EU and anti-bailout Syriza party would come out on top if nationwide elections were to be held.

If this did prove to be the case, and the Syriza party honoured its pledge to tear up the nation’s bailout agreement, then the European Union and the global investor community would be left staring down the barrel of  a “Grexit”; the first exit from the union of a euro area member.   

Accordingly, all eyes shall remain fixed firmly upon Greece for the week, with the outcome of December price action almost entirely dependent upon the Greek Parliament’s next move.

EU INDICES // 10 Minute Intervals – (DAX, Black), (CAC40, Red), (IBEX 35, Blue)

EUINDICES15DECE

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