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Yesterday’s trading day can truly be described as a ‘game of two halves’

In the morning, better than expected German GDP data allowed the euro zone as a whole to avoid recession and the euro retraced across the board, at one point registering a 0.5% gain on the day against the pound. By the time the London markets closed last night, the pound had recovered all of the losses incurred in the morning to register a fresh 3 ½ year high against the euro as fresh worries about Greece hit market confidence.
The German GDP data showed that its economy expanded by 0.5% in the first quarter of 2012, a figure five times better than what the majority of analysts had expected. This not only shook off any fears of a German recession but allowed the euro zone to also avoid recessionary territory although the majority of the euro zone continues to struggle with a slowdown, putting further pressure on the European Central Bank (ECB) to loosen monetary policy to support the euro zone economy.
“While it is welcome news that the Euro zone avoided recession, its performance is hardly something to celebrate as GDP was only flat year-on-year in the first quarter of 2012,” said Dr Howard Archer, Chief European Economist at IHS.

“Furthermore, generally weaker latest data and, particularly, survey evidence suggests that renewed GDP contraction is very much on the menu for the second quarter,” he warned.
“The better-than-expected German numbers have offered the euro some support but it remains vulnerable to headlines,” said Jane Foley, senior currency strategist at Rabobank.
“It serves as a reminder to investors why the euro has been resilient to downside risks. But the prospects for the ECB to step in over the coming months to address not only the recession but contagion fears are rising.”
Sure enough, as news began to filter out of Athens from lunchtime that Greek politicians had been unable to form any kind of government, forcing the country into a potentially devastating fresh round of elections, so the euro rally began to falter. Elections are likely to be held by mid-June.

The radical leftwing party Syriza put the last nail in the coffin after insisting that it must remain true to its anti-bailout stance. Other leading parties have accused Syriza of holding out in order to increase its power. The party tripled its representation from the 6 May elections to come in second place and now leads in opinion polls. Syriza leader Alexis Tsipras shrugged off the criticism. “We were only a few thousand votes short of first place on May 6th and this kept us from creating a left-wing government that would cancel the (EU/IMF) memorandum and would rebuild the country from the ruins which the parties that supported it have left behind,” he said.

The Greek parliament is expected to be dissolved by Tuesday of next week with a caretaker prime minister to be appointed in accordance with the constitution from one of Greece’s three highest courts. This is to pave the way for the elections expected in mid-June.

“The next vote is being branded a referendum to stay in the euro zone due to growing support for Syriza party leader Alexis Tsipras, who has vowed to tear up the bailout agreement which the euro zone leaders have indicated would lead to Greece being kicked out the Euro zone,” said analyst Craig Erlam from Alpari.

Yesterday, new French President François Hollande was sworn in to office and his first act was to fly to Berlin for face to face talks with German Premier Angela Merkel. Despite the ever increasing speculation of a potential Greek exit from the euro zone, in the press conference following their meeting, both leaders expressed that the country should stay part of the single-currency.

“I want to reiterate, and we agreed on this, that we want Greece to remain in the euro,” stated Angela Merkel. Merkel also noted that “the euro is not only a monetary project but also a political one.” Regarding Greece, she said that she “respects” the decision to hold new elections and said she wants the country “to stay in the euro zone if it wants to.”
Worldwide stock exchanges and commodity markets are also bearish with the FTSE100 index in London and the Dow Jones in New York at 2012 lows and oil prices have also fallen to register a 2012 low.

This has increased demand for so called ‘safe haven’ assets with the US dollar the main beneficiary.