AMSTERDAM—Last week, European markets saw a slew of economic data releases as well as bond auctions and several sovereign themes coming to the fore amid rising trading volumes.
Economic data for the eurozone itself came in little changed and right on top of expectations. The PMI is still in recession territory, unemployment above 10 percent, and consumer price inflation is cooling off a little. Only retail sales really disappointed, dropping 2.5 percent year over year (YOY) in November versus an expected drop of only 0.9 percent.
German Factory Orders Plunge and French Auction Fails
Perhaps the little noticed shocker came in the form of German factory orders dropping 4.3 percent YOY in November compared to -1.8 percent expected and a rise of 5.2 percent in October. Italy’s budget balance improved by 8 billion euros ($10 billion) in December finishing the year at -61.5 billion euros (minus US$82.5 billion) but new car registrations plummeted 15.3 percent YOY in December a further deterioration from the negative 9.25 percent in November. All is not well in the eurozone.
Given the timing of the releases, it is perhaps of little surprise that the euro fell out of bed badly after rallying to a high of $ 1.3077 last Wednesday. It then crashed to a close of $ 1.2721, losing 2.7 percent in the process. This drop in the euro was facilitated by an increase to an all-time record in speculative future short positions in the common currency as the recent “Commitment of Traders” report shows.
Not helping was a French bond auction that targeted to sell 8 billion euros ($10 billion), but managed to sell only 7.96 billion euros, but yields widened only modestly.
The Euro Stoxx 50 benchmark equity index followed the euro to close at 2,298 losing 0.77 percent, but giving up most of the gains after rallying to 2,392.
Unicredit Shares Plunge as ECB Deposits Hit Record
The trouble did not end here for the euro and its banks. After announcing a 7.5 billion euro ($9.5 billion) rights issue, Italian bank Unicredit was back at square one, as shares plunged 38 percent last week, leaving it with an equity market capitalization of only a little bit more than the said 7.5 billion.
Given the inherent leverage in the banking sector, raising equity is one method to decrease it, but rights issues can impact the share price and therefore market based equity exponentially in adverse conditions. Unicredit is therefore an example that might deter other banks from pursuing the same route.
In addition, the European Central Bank’s (ECB) deposit facility hit another all-time high last week, peaking at 453 billion euros ($574 billion). So it appears to be the case that the money loaned out by the ECB through its longer term refinancing operations is finding its way back to the central bank immediately instead of going into loans to consumers and businesses.
Spain Misses Deficit Target
The figure released by the new Spanish government late in the week before last appears to be a classic kitchen-sink exercise. When new governments or company management take over from the old management or administrations, they are likely to prerelease bad numbers and blame them on their predecessors.
In Spain’s case, the projected deficit came in at 8 percent rather than the 6 percent targeted. European Commissioner Olli Rehn said that he “regretted the sizable fiscal slippage” but welcomed new measures from Madrid.
Greece Bankruptcy Tension Heating Up Again
Given the troubles in Spain and Italy, the focus on Greece has been less, but the country that started the crisis should not be forgotten.
“The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro,” said Greek government spokesman Pantelis Kapsis when interviewed by Skai TV. He was referring to the second bailout for Greece that was signed last June but has been stalled by renewed questions about bondholder participation rates.
A 50 percent haircut was agreed upon, but was never executed, maybe because some minority shareholders such as hedge funds are holding out, trying to exploit clauses in the bond indentures that might guarantee them a higher payout. The market prices Greek bonds at 23 cents on the dollar, indicating a recovery even lower than Argentina’s in 2002 and expressing zero confidence in a solution for Greece.
A spokesman for the European Commission, Olivier Bailly, expressed dissatisfaction with Greece’s progress on reform and announced that money due to be paid in December under the first bailout agreement of 2010 would only be disbursed in March, further adding to the tension.
The Week Ahead
The ECB will hold its policy meeting this week, but consensus expects no changes after the extraordinary measures taken last month. After the disappointment in factory orders, German industrial production for November will be key to watch.
There is a meeting between German Chancellor Angela Merkel and Italian Prime Minister Mario Monti in Berlin on Wednesday, but it will be more interesting to see the Austrian, Italian, and Spanish bond auctions after the jitters of this week.
