FTSE 100: 5350.05 ▲ 83.64 (1.59%)
Get set for another week of firefighting as the Bank of England takes more measures to stimulate the UK economy, and negotiators scramble to reach a deal to keep the Greek economy afloat.
The week begins with a meeting of euro area finance ministers to scratch out a second Greek bailout package. As part of these negotiations – which eurozone chief Jean-Claude Juncker described as ‘ultra-difficult’ – agreement has still not been reached on how much of a hit private holders of Greek bonds will be willing to take.
An optimist would say the jigsaw is finally being put together; a pessimist that there is alarming sense of déjà vu. Either way, the markets’ surprising tolerance of this painful Greek funding limbo could end if a deal is not forthcoming.
Much better than expected US jobs figures on Friday highlighted again the growing chasm between the state of economies on opposing sides of the Atlantic.
The European Central Bank will be at the centre of attention in the coming week, though it isn’t expected to actually do anything. For a start there is pressure on the bank to relinquish gains on the Greek bonds it holds as part of the negotiations on Greece’s finances. But the ECB is refusing to yield here.
Then the Bank’s council meets on Thursday to decide whether any more measures are needed to boost the eurozone economy. Mario Draghi’s bank is expected to keep the main rate on hold at 1% amid slight signs of improvement in the region’s economy.
‘The major interest here will come in ECB president Draghi’s post meeting press conference, where the main subject of debate is likely to be whether the ECB is willing to accept a ‘haircut’ on its Greek bond holdings,’ according to Investec’s Victoria Cadman.
But similarly tentative economic improvements across the channel are not expected to stay Mervyn King’s hand. Rather, after the 0.2% economic contraction in the fourth quarter of 2011 and as inflation comes down, a further tranche of quantitative easing bond-buying money is seen as a dead-cert. The only question is how much the Bank of England’s monetary policy committee wants to spend, with the consensus backing £50 billion.
Philip Rush of Nomura commented in a note: ‘We continue to expect the Monetary Policy Commission (MPC) to announce another £50 billion of purchases at its February meeting, to be conducted over three months. We continue to question whether such a response is consistent with the inflation outlook, but that is demonstrably not the MPC’s view.’
If the Bank follows this with another £25 billion later in the year, which is also expected, then it would own around one third of the total gilt (UK government bond) market, economists at Société Générale note.
The Bank may alternatively sign off the full £75 billion on Thursday. ‘We believe the consensus understates the MPC’s willingness to use monetary policy (ie extra QE) to support the economy as inflation risks recede. Moreover, we suspect the consensus does not appreciate just how much QE is needed to give the economy a significant boost. Hence, QE is likely to exceed the consensus forecast even if growth does not undershoot the consensus,’ commented Michael Saunders at Citi.
David Blanchflower, a former member of the MPC, agrees that the committee will plonk for this larger number, as he related in an interview with Citywire on Thursday.
Always looming menacingly in the background is the threat of a Chinese slowdown. Investors are hopeful that while this ‘hard landing’ scenario won’t come to pass, the Chinese authorities will provide some market-boosting monetary easing. Inflation data due this week, which are expected to show a further decline after December’s 4.1% reading, will provide further clues as to authorities’ options.
Corporate news could steal a march from the now-humdrum economic gloom with news reports that an industry-changing merger between Xstrata (XTA.L) and Glencore (GLEN.L) could be announced next week, after official confirmation on Thursday that the two are in talks, and ahead of Xstrata’s 2011 earnings release on Tuesday.
Bid uncertainty aside, gold miner Randgold (RRS.L) starts a big week for corporate numbers on Monday.
On Tuesday blue chips reporting to the market include BP (BP.L) and GlaxoSmithKline (GSK.L), as well as the aforementioned Xstrata.
DMGT (DMGO.L), Thomas Cook (TCG.L), Reckitt Benckiser (RB.L), and BHP Billiton (BLT.L) are among companies reporting numbers on Wednesday
Thursday brings a bumper crop, with numbers from Hargreaves Lansdown (HRGV.L), BG Group (BG.L), Vodafone (VOD.L), Diageo (DGE.L), British Land (BLND.L), Rolls Royce (RR.L), Rio Tinto (RIO.L) and Shire (SHP.L).
Then Friday sees Barclays (BARC.L) become the first bank to report 2011 earnings, to be followed by its competitors later in February.
Comments (17)
It,s DEJA VU 4. A bit like the Rocky movies, same plot different setting, but without the blood.
16:38 on 03 February 2012
This dose of QE referred to above is likely to be like pouring on super refined fuel to the fire, never mind petrol.
The market is crazy, big rise and nothing being done to reduce the debt, talk about playing with fire, and the trouble is that it is the ordinary investor that is going to be roasted to pure carbon.
16:38 on 03 February 2012
Quantitative easing is a lunatic’s idea of sanity and insanity controls the Bank of England.
19:32 on 03 February 2012
Has QE not worked in the USA?
13:36 on 04 February 2012
A previous CW article referred to QE in Europe as a huge Ponzi scheme. Yes, despite denials, ECB is printing money. It lends to European banks at one percent and they are expected to buy government gilts and nett themselves 2 or 3 % in a nice little carry trade. The government uses some of the money to pay interest on its new bonds, some to keep itself afloat through these dark days.
But the day of reckoning must come at some point and maybe there is no light at the end of the tunnel.
01:47 on 05 February 2012
Is this the same Blanchflower who was one of Gordon Brown's placemen and was known to vote always for yet more interest rate reductions to fuel the housing boom? Did he not recently recommend doses of inflation to help rid the country of debt? Standard left wing economics.
09:35 on 05 February 2012
More QE = Higher inflation, a rise in share prices and devaluation of the pound.
It will help reduce pension deficits by increasing share prices, even though in real terms when the devaluation of the pound is considered they will not rise so people will just be able to spend less with what they receive. It will allow employers to put up wages more related to the BOEs low interest rates (also a side effect of the government using money it has just created to buy its own debt) than inflation.
So the outlook and reasons for QE are probably more a way of contracting the economy without causing unset by cutting pay with devaluation of spending power rather than reducing the amount of money people take home, it's just a shame the government can't be honest about it!
10:07 on 05 February 2012
QE may have provided an element of safety net when things were at their worst in 2008/09. It seems unlikely that it can achieve muich in current conditions where banks continue to prioritise reducing the size of their balance sheets, while many credit-worthy borrowers remain unwilling to commit in view of the uncertain outlook.
10:18 on 05 February 2012
Cape Town you are right in theory, the banking crisis might be replaced by a Government bond (gilt) crisis if QE is applied recklessly. However, in combination with bank restructuring, asset write-downs, bank deposit guarantees and underwriting of a general systemic risk, it is appropriate for a short while. Japan tried it and has zero growth for more than a decade. QE must in combination with the other measures restore confidence in the banking system in order to enable businesses and consumers to spend again and the economy to grow. At present there is huge deleveraging in process, companies are hoarding cash.
10:20 on 05 February 2012
OK, we're in the shit and none like it, so what's the answer; apart from hosing down?
10:23 on 05 February 2012
Best make the most of it and buy shares. Sell at the right time though.
10:25 on 05 February 2012
Peter; agreed! nothing else you or I can do.
10:36 on 05 February 2012
A cliche perhaps but you really couldn't make it up could you!!
We're pumping billions into the halfwit Greek economy (yes, through the back door of the IMF) and the EU in general, whilst at the same time denying people in this country life-saving drugs because they can't be justified on the grounds of cost!!!
Priorities?
10:58 on 05 February 2012
Bite the bullet and screw the euro! somebody; Germany?
12:48 on 05 February 2012
Jonathan, Osborne is not stupid. Crooked more likely, because the higher the share prices, the more likely he gets CGT down the line!
17:02 on 05 February 2012
@Pertan
Could you expand on your comment " in combination with bank restructuring, asset write-downs, bank deposit guarantees and underwriting of a general systemic risk, it is appropriate for a short while." ?
The markets are not going to hold their breath indefinitely. QE and low interest rates can support asset prices and push owners of capital to invest or spend, but I do it seems clear that the cost of lending to stricken governments will rise inexorably until they admit they can pay no more and go bust.
You could with a bit of imagination see QE as part of a Keynesian cycle. Well, OK, maybe. Could you expand on your comment and explain a little how QE can be either a permanent solution, or if it will work only "for a short while" what "systemic" changes will have been made to allow a return to non-QE economics.
You see, the official commentators, talk of the need for confidence - only this is missing. But I think what is missing is credibility.
06:13 on 06 February 2012
Cape Town,
What I am saying is that QE on its own is not enough as the Japan experiment proved. Below a quote from a previous article
One of the lessons of this episode in Japan (QE) for policymakers is that while quantitative easing may help to solve the short-run liquidity problems that arise in times of extreme financial duress, it is not a substitute for some of the harder choices governments must make.
These include underwriting of systemic financial risks, e.g. by guaranteeing bank deposits, the re-capitalisation (forced or voluntary) of the banks, regulatory pressure on banks to disclose and write down the bad assets, or the pressures on businesses directly via their banks to restructure and deleverage or shut down.
A worst-case current scenario is that policymakers rushing to quantitative easing fail to understand this, giving us a bond-bubble but no permanent fixes of the underlying structural problems.
In that case, when the bond-bubble bursts, paradoxically, quantitative easing will have increased systemic financial risks instead of decreasing them.
08:25 on 06 February 2012
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