Markets jaded by global political upheavals

One has to wonder whether the market has faith in a successful outcome to the current political wrangling, or is it merely jaded by the same old story.

When it comes to Italy political instability comes with the territory, and benign moves in the Italian bond market somehow reflect the sense of déjà vu. The potential for fresh elections, which could delay economic reforms in Italy, have unsettled the markets but not yet to a huge degree. If anything the sell-off has largely been confined to the Italian bourses, whereas a few years ago the entire European stock market would have been feeling the effects. The overriding sentiment is that it will pass, but whether this amounts to complacency or genuine belief that the leaders will come to an agreement is hard to tell for now.

The euro has gained against the US dollar over the past few weeks, but has yet to push through the $1.3570 level with any real purpose. Overnight, the US debt ceiling impasse sent a lot of capital flow to safe-haven currencies such as the yen and the Swiss franc, while the US dollar also kept its reserve status and saw a degree of inflow. The dollar basket bounced off the $80.12 level – more on the back of the USD/JPY price action rather than any real fundamental changes in the eurozone or the US.

Eurozone progress

What is certain is that this is not 2011 – the US may still be stuck in kick-the-can mode but the eurozone has made some progress. Unemployment and growth remain problems, and then there’s the Italian political scene, which is, as always, dramatic. But in terms of central bank policy, or its market perception, the eurozone has made some improvements.

‘Whatever it takes’ still rings in the ears of those who thought the euro experiment to be doomed. The potential introduction of the European Stability Mechanism (ESM) to replace the European Financial Stability Fund (EFSF) has succeeded in damping borrowing costs for the highly indebted nations. What must be remembered is that if push was to come to shove, the ESM would do little to back-stop Italy in a fully-blown crisis. Italy, after all, has the third largest bond market in the world.

Monday’s European CPI data was below expectations and also remains below the pivotal 2% target level that the European Central Bank is tasked with hitting. ECB chief Mario Draghi intimated that LTRO (long-term refinancing operations) might be necessary for some European banks. This is not quantitative easing, but it would add more liquidity to the market. Mr Draghi would like to think that this would have a dual effect – the euro would weaken against the likes of the dollar and make the export sector in Europe more competitive. We could also expect that a less deflationary effect as a result of the looser policy, which would work well for ECB price stability.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.