US Economic Update – 04 February 2015

European equities shrug off new Greek government in favour of easy ECB

The last week in Europe and indeed, everywhere else in the world, has been all about Greece. While the new Prime Minister spent much of it organising his new cabinet, he did find enough time to announce an immediate halt to the privatisation of state assets within Greece, placing the new government immediately in breach of the conditions of its bailout.

The new PM also announced a 50% increase in the minimum wage before his finance minister went on to declare to the world that Greece would no longer negotiate with the Troika, nor would it seek an extension to its bailout.

The initial moves by Greece’s new parliament, while a cause for concern over the medium term, have done little to unseat financial markets. This was as, with the exception of Spain, most major European indices closed higher last week as investors continued to value the easy money stance of the ECB over concerns of any potential EU disintegration.

In addition to this, some of the week’s economic data for the continent also emerged stronger than expected, doubtless helping to stave off any feeling of pending doom among investors.

In detail, retail sales increased for the third month in a row while the German IFO business climate survey also came in moderately ahead of expectations, although price pressures in Europe’s largest economy eased further.

Europe wide inflation fell further than anticipated during the month, to -0.6%, which will boost consumer confidence briefly but worry policy makers at the same time. Despite weaker inflation across Germany and other parts of Europe, areas of the periphery appear to have triumphed during the recent week.

This was as Spanish GDP came in ahead of expectations for the final quarter, while unemployment was revealed to have fallen sharply in Italy during December.

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Looking ahead

We do not rule out the possibility of increasing volatility during the weeks ahead as negotiations between various organisations and Greece’s new government progress.

However, key markets such as the DAX and France’s CAC 40 appear to be taking the likelihood of this in their stride at present.

On balance, we expect equity market weakness arising from the Greek issue to continue to be offset by an investor focus upon the beginning of the ECB’s QE program in March. Except in the event of a Greek move toward the exits of the European Union, this should remain the case for the foreseeable future.  

EU Indices / Dax – Black / CAC 40 – Blue / IBEX 35 – Red

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