STOCKS just about managed to snap a three-week losing streak on Friday but the FTSE is still down nearly seven per cent for this month. Selling at the beginning of May would have been smart.
For now, it’s hard to see how asset markets won’t continue to be held hostage by uncertainty surrounding a possible Greek exit. And that uncertainty is continuing to feed into poorer economic numbers, as witnessed by the Eurozone purchasing managers’ indices (PMIs) and German IFO numbers. In fact, whether we get any kind of Eurozone break up or not, the damage from the idea that it might happen continues to grow.
Reports have highlighted how banks are now beginning to match lenders and borrowers within national borders, wiping out any benefits from a previous single zone. Until we know how the zone survives and in what shape I can’t see why any overseas investor would take the risk of putting money to work in any of the peripheral countries – a problem that further compounds negative growth.
There’s a sense that the Greek elections on 17 June may prove to be a cathartic moment. My fear is that it will be anything but.
On the one hand we may see a series of events where neither the Germans nor the Greeks are bluffing, the money runs out and that forces a Greek exit which tears up the irrevocability of the single currency. Once that happens the chain of events is hard to predict but speculation on which country would follow next would be rampant.
On the other hand we get a result that sees Greece renegotiating parts of its bailout and attempting to stay in the Eurozone. In this scenario, many will say we have just delayed the inevitable.
In such a climate all the fresh talk of a growth compact becomes fairly pointless. Project bonds and infrastructure spending are tinkering at the edges and supply side reforms need the private sector to feel confident to invest. But confidence for large scale investment will never materialise until investors know with some certainty what the future in Europe holds.
Right now there is not a single person who knows what will happen in two weeks, two months or two years. Europe needs to decide what the future looks like and then its leaders need to clearly explain the costs and sacrifices needed to attain that future and start making it happen. I may be wrong but I’m not sure we should be optimistic for an early resolution. When it comes to European politics, Fudge has always been the horse to back.
And fudge allied with fear is why Gilt and Bund yields have hit fresh record lows. In a year, 10-year gilt prices have risen by 15 per cent. On any normal metric there is clearly no value, yet plenty of forecasters predict yields will keep going lower. Bearing in mind the poisonous mix of Eurozone politics and economics I dare not suggest they’re wrong.
Ross Westgate co-hosts Worldwide Exchange daily from London and anchors Strictly Money on CNBC