The Monday Report

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By Greg Peel

The people have spoken, and it's becoming increasingly clear there's not an awful lot Angela Merkel can do about it. Whether or not it is in the best interests of Europe to hold the eurozone together is rapidly becoming irrelevant. Democracy doesn't work that way.

Greece has until Thursday to attempt to form any sort of coalition government before another election must be called, and no one believes the Greeks will not be returning to the polls on June 17. Nor does anyone believe the result of a second election will produce an outcome that could prevent a Greek exit from the eurozone, whether of its own volition or by being abruptly shown the door. The left wing Syriza party seems to believe there is a solution that sees Greece remain in the euro following the complete abandonment of the austerity measures enforced as a requirement of the bail-out, which is akin to having one's cake and eating it too. The rest of the world is quite happy for the Greeks to eat cake.

As Merkel's party was suffering a crushing defeat in a major German provincial election on the weekend, the German finance minister was on air desperately suggesting that perhaps there is a way to provide stimulus to eurozone economies rather than just budget cuts. This is an obvious concession to new French president Francois Hollande, but even more obviously a now necessary policy shift from the zone's most influential player. As public protest in Spain hots up, one might suggest the Titanic has finally spotted the iceberg and has called hard to port. As to whether the German government can avoid a collision is now the question. Merkel could otherwise end up being “right” about a common Europe, all the way to the bottom.

The way I see it, Greece is gone, and that in itself will be a popular result among the German voters and voters right across Europe. The next to go will not be Portugal or Ireland, but Spain – the zone's fourth biggest economy – unless the powers that be come up with a completely different policy beyond harsh austerity. Such a policy would require an awful lot of printed currency, to the point where the Germans can once again sing “Life is a cabaret”. A ceremonial booting out of Greece will nevertheless be politically popular and, in combination with a policy shift, might just provide enough glue to hold the fracturing eurozone together.

The only surprise is that there appears to be little surprise. Whether because the rest of the world saw this day coming a long way back, or has at least positioned itself to cope were it the case, financial markets have not panicked. There may be some panic to come but on Friday the Dow closed down a mere 30 points or 0.3%, and that was all about yet another major global financial institution throwing up its hands and calling “rogue!” in order to disguise yet another complete and utter failure of internal risk management protocols. At the end of the day JP Morgan's US$2bn loss (to date) on a CDS trade gone terribly wrong seems like pocket change to a world in which no one longer blinks unless the numbers involved end in “trillion”.

Wall Street also saw a better than expected read on the fortnightly Michigan Uni consumer sentiment index on Friday, which helped to contain the losses. The S&P closed down 0.3% to 1353 and the Nasdaq was flat. The session had closed before Saturday's unsurprising announcement from Beijing that the reserve requirement ratio for China's large banks will been cut by 50 basis points to 20.0%. The world has been expecting a further policy easing in China and last week's soft trade, industrial production and retail sales figures provided an obvious impetus, made possible by a benign read on inflation.

This is a positive for Australia, and the local bourse will open on a Friday night indicator of a two point rise in the SPI Overnight ahead of the Beijing announcement. The Aussie is down a further 0.7% and is now holding tentatively above parity at US$1.0024. The US dollar index is up slightly at 80.30, yet the US ten-year bond yield is now 4bps lower at 1.84%.

Gold took another hit on Friday however, down US$13.00 to US$1580.40/oz, while base metals were mostly softer, with copper down 1.5%. Brent crude fell US47c to US$112.26/bbl and West Texas fell a heftier US$1.51 to US$95.57/bbl.

It is perhaps timely that the eurozone will release its first estimate of March quarter GDP this week, on Tuesday, as well as industrial production, trade and inflation data and a business climate index over the course of the week. The ball is now firmly in Germany's court, and this week will be beholden to rhetoric from Berlin. There will nevertheless be a solid raft of economic data releases from across the globe.

The US will see retail sales, housing sentiment and the Empire State manufacturing index tomorrow, industrial production and housing starts on Wednesday, and the Philly Fed manufacturing index on Thursday. Tomorrow will also see the release of the minutes of the last Fed meeting, from which Wall Street will be looking for comforting signs QE3 is squarely on the table. It seems the only thing preventing a collapse of world stock markets at present is the anticipation of more monetary stimulus across the globe.

Australia will also be focused on policy easing as the RBA releases the minutes of its last meeting tomorrow. We've had 50 points, will we soon be seeing more? The way things are going in Europe one would be forced to assume so. Today brings housing finance and investment lending and tomorrow sees vehicle sales. There's more lending data out on Wednesday along with the Westpac consumer confidence survey.

On the local stock front, today sees earnings results from Dulux ((DLX)) and Incitec Pivot ((IPL)), on Wednesday its CSR ((CSR)), and on Thursday Commonwealth Bank ((CBA)) will provide a quarterly update.

FNArena's esteemed editor is currently on an overseas assignment and as such will not be making his regular appearance on Sky Business either this week or next. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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