New cans please!

Mario Draghi’s problems might be on the rise as he appeared in front of the European parliament on Monday. Last week the widening spread between Italian and Spanish bond yields was making the headlines. This week, as the process to elect the new French president gathers pace, Marie Le Pen’s rise in the polls is causing jitters in the French bond market. One of Marie le Pen’s clear policy aims is to look to withdraw France from the euro. The spread between German and French bond yields, in common with Spain and Italy last week, have risen to the wides of 2012. Mario Draghi confirmed on Monday to the European parliament that the bond purchase program will continue, despite the threat from rising inflation. He also went onto praise the way Germany had managed its economy, which could have been a small dig at one or two of the other eurozone countries. 

The chairman of the ECB would have had little choice to reinforce his position on quantitative easing, as any signs of the bond purchase program could be wound up sooner than expected may exacerbate further dislocation in the European bond market.

As much as European elections are making headlines, Greece may come back to the fore again as well. The latest negotiations on the Greek bailout suggest there are once again splits within the IMF and the European Union. Yields on two-year Greek debt have risen to 9% in the past few days. February 20th  is the date of the next meeting of euro finance ministers, by which time new agreement on fresh austerity measures are hoped to be made. A failure to come to an agreement could raise the possibility once again of a Greek debt default.

In years gone by the phrase “kicking the can down the road” was used to describe how Europe was looking to deal with the unsustainable levels of debt within several European economies. This phrase described introducing short term measures to put off the day when more painful decisions need to be made. That phrase had rather disappeared as economic growth and inflation in the region started to pick up. It may become apparent in the coming weeks that Mario might need to find new ways to kick the can again

There continue to be signs that, equities aside, risk appetite may be on the wane. Part of the reason may be resurfacing of concerns on Europe; other reasons may be a consequence of the challenge to Donald Trump’s travel ban. If this declaration can be challenged it could leave investors to wonder if some of his other initiatives may also be harder to introduce. The price of gold has been on the rise in the past month, ten year US treasury yields have been falling, and at 2.41% are lower than where they started the year. The US dollar has gained ground against the pound and the euro, but has continued to lose ground against the yen.  

Posted on February 7, 2017 .