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There were early signs late last year, but the storm only broke in the opening moments of January 2015: Europe hitting new and old multiple potholes. It didn’t hit the rand, but certainly the JSE.
Greek exit rumours (“Grexit”), collapsing oil prices transforming European inflation into deflation last month, ECB President Draghi playing the war drums (hinting at growing likelihood of QE sovereign bond buying), Euro steadily weakening, uncertainty seeping in, such growing defensiveness depressing equity markets, and this spreading like wildfire, spilling over into EM, such as SA markets.
What a way to begin 2015: With an old fashioned panic (or at least some kind of stampede).
A Greek crisis may be imminent. Then again, it may not be. But if one occurs, Europe might be better able to handle it than three years ago.
That seems to be the gist of the news flow.
Greek elections are imminent. If won by the populist opposition, one outcome could be a Grexit. The Greek opposition is now saying it won’t exit from the Euro, but will want half foreign debt forgiven.
This is not acceptable to other European governments, in which case Greece might be pushed into exiting rather than voluntary jumping. It might also give the Greek electorate pause, in which case none of this may happen.
It is clear other Europeans no longer feel as exposed as three years ago in terms of bank systems.
The scope for Greece to hold their partners to ransom may thus be much less severe.
What is playing is a test of wills regarding Greek participation in the Euro, not whether the Euro will have another existential crisis instalment.
But for some that apparently doesn’t sound exciting enough. So not a few see in this another Euro existential crisis.
But if that doesn’t fly, there is an even bigger opportunity for mayhem regarding European growth stagnation (while America is starting to fly), threatening Eurozone deflation (now inevitable with oil collapsing), inflation expectations starting to give way (coming adrift), and injecting into ECB councils a flaring argument, between those who see lower oil prices igniting growth and therefore favouring no action and those who see deflation unhinging inflation expectations requiring policy attention.
And just to keep things interesting, there is the ideological divide between the Germanics who are in principle against QE sovereign debt buying (though claiming to be willing to do whatever it takes) and the non-Germanics in favour of more policy action aimed at keeping inflation expectations anchored near 2%.
A lot of noise, but what are the consequences?
Spanish prices fell by 0.4% in December. German inflation was 0.1%. The Eurozone overall probably already experienced deflation of 0.1%, driven by collapsing oil prices, which aren’t yet fully reflected, so likely deepening deflation further in January.
ECB President Draghi has for some months been positioning the public debate for the start of QE sovereign bond buying, against spirited Germanic opposition. But the moment is getting close where this argument will be put to the vote. Markets have sensed for some time it will happen, and have sold the Euro.
Meanwhile, American growth and anticipated Fed action this year in starting serial interest rate increases (three hikes of 0.25% are expected in 2H2015) are driving the dollar steadily higher.
Thus the growth and inflation reality, the policy positioning and market anticipation are steadily driving dollar and euro apart. From a recent early 2014 high near 1.40:€, the dollar has now firmed to 1.18:€ with further gains to come.
American equity markets (outside of the energy sector) are encouraged by the US growth prospect and the falling oil price. European equity markets on the other hand have been discouraged by the European growth stagnation, the sense of renewed crisis surrounding Greece, the ECB infighting, and the lack of wider policy response.
Markets elsewhere feel the heat of the ascending dollar, while becoming infected by the European fears. And uncertainty as to where oil will lead?
Triple jeopardy.
The rand is holding up well against the euro (back again below 14:€) even as it weakens against the dollar (near 11.70:$). The JSE All Share has been blooded, plunging through 48 000 as deeper unease has steadily mounted, fed by global concerns.
What a way to start 2015. And this before Eskom, Amcu and friends even have had time to show their intentions for 2015 at home.
* Cees Bruggemans is the consulting economist at Bruggemans & Associates. His website is at www.bruggemans.co.za and email economics@bruggemans.co.za
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