Afternoon analysis 10.12.2014:
The euro was stable before TLTRO tender as Greek political crisis fades. French economy deteriorated. The rouble near record low before rates decision. The zloty with appetite for more gains.
Greece got market focus as the country faces possible political turmoil. There may be snap election if the parliament fails to elect president. According to polls, that scenario may send radical left wing SYRIZA party to form new government. This party is willing to drop austerity reforms and leave the euro zone.
The future of Antonis Samaras's government depends on whether he is able to acquire support for his presidential candidate Stavros Dimas. A former EU commissioner may gain support from right wing parties as Samaras requires 180 votes to accomplish this task and has only 155. However, the odds for final success are quite high.
Nevertheless, the unpredictability of situation will weight negatively on markets until next week's final vote. Interestingly, the euro is gaining for a third day in a row, in spite of news from Greece. In the meantime, bonds and stocks posted significant losses.
The European Central Bank will allot cheap loans in the TLTRO operation on Thursday. Preceding offer of cheap loans was a disappointment as creditors got only 82.6 billion euro. This time bank are expected to make a bid for about 150 billion.
This is, however, too little to believe that the ECB may fulfill its goal of expanding balance sheet to 2012 level. As a result, a low demand at TLTRO will probably weaken the euro as recent three day upward move didn't have solid ground.
France faces growing problems
The second largest economy of the euro zone faces growing deterioration of economic conditions. Today's reports showed that industrial production dropped 0.8 percent against 0.1 percent growth expected. Moreover, employment numbers also declined 0.3 percent, more than minus 0.2 percent projected.
The Bank of France projected 0.1 percent GDP growth in the fourth quarter of 2014. Given recent poor data and a negative outlook, the odds for turnaround are very low.
In the meantime, the French government has to address the impairment of public finance. President Francois Hollande stepped up efforts to improve economic growth by embarking some pro-market reforms and increasing labor market flexibility. This endeavor is aimed at avoiding sanctions imposed by the European Commission after Paris would not meet its commitment to keep deficit below 4 percent of GDP.
The return of the Greek crisis on headlines call to mind that fiscal crisis in the euro zone is still viable. Especially the economies that refrained from costly reforms during crisis may face returning problems. Countries like France and Italy used measures provided by the ECB not to improve their economies, but to preserve status quo. That will be very costly in the future.
The rouble near record lows
On Thursday the Bank of Russia is to announce decision on interest rates. The cost of credit is expected to be increased to 10 percent from 9.50 percent currently.
This year the rouble lost near 40 percent against the dollar. Given this, Russian monetary authorities were beaten severely by the market. Any of measures imposed by the central bank – higher interest rates, increased dollar liquidity or revamp of intervention model – didn't stop the slide of the currency. In the previous week central bank sold dollar to shore up domestic currency three times, without lasting result.
Today one can see low volatility in the rouble market. This may suggest that speculative investors refrained from taking significant positions before rates announcement as the central bank may introduce new measures to tame the rouble's losses.
The zloty ready to gain
Increased volatility in the markets didn't affect significantly the zloty. The Polish currency is stable against the dollar and the euro due to diminished likelihood for interest rates cut and quite good economic performance. This factors made the zloty less susceptible for risk aversion and put the zloty in a position to extend gains after the broad market sentiment improves.
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