London - The late spring warmth spreading across Europe and
the United States is unlikely to soothe a growing anxiety in financial markets
that the global outlook is anything but balmy.
An escalating eurozone crisis and weak data from China and
Europe have turned investment flows ever more firmly toward safe-haven assets,
mainly in the US, and away from anything with a hint of risk - a trend that is
In the coming week investors find out if the list of current
concerns extends to the health of the giant US economy with May non-farm
payrolls and consumer confidence reports due, along with a more detailed
reading on the first quarter’s economic performance.
But the focus of market attention will mainly be on risk in
Europe, centered on elections on June 17 that could leave Greece governed by
parties opposed to the international bailout that is keeping the country
That could force Greece to leave the eurozone, causing
collateral damage of a scale that is hard to assess to the world’s fragile
economic and financial system.
To the west, a perfect storm of soured bank loans and
regional governments flirting with bankruptcy is gathering over Spain, with
Bankia seeking a €15bn bailout and Catalonia also going cap in hand to Madrid.
“I don’t think Europe will drag down the rest of the global
economy if nothing too bad happens. The problem is there’s a possibility that
something too bad will happen,” said Peter Westaway, chief economist at
Vanguard Asset Management.
That uncertainty is spreading across the world is
highlighted in data from fund tracker EPFR Global showing that emerging equity
funds saw outflows of over $1.5bn in the week to May 23 after losing $2.25bn
the previous week.
Emerging market bond funds lost almost $500m in the same
period, their first decline in 19 weeks.
Also in the past week, the European Central Bank said in the
past week that direct and portfolio investment recorded net outflows of €54bn
in March, the month after the second of its two massive liquidity injections
into the banking system.
At the other end of the risk scale, Germany was able to sell
a two-year bond in the past week that offered investors no regular return and
found buyers lining up for the deal.
The yield on 10-year US Treasury note dropped to near 1.7%,
close to its lowest level on record, while the dollar indexed against a range
of major currencies touched a 20-month high.
After a volatile week on global equity markets, MSCI’s world
share index gave up virtually all its gains for this year and has fallen 12.5%
since its peak at the end of March.
The speculation about Greece exiting the euro, contagion in
Italy and Spain, and the future of the whole eurozone project still isn’t fully
reflected in market prices, according to some analysts.
“We think that the ramifications of a Greek exit are more
serious than the market anticipates,” analysts at Morgan Stanley said in a note
“While a eurozone break-up is not our base case scenario, we
raise our subjective probability to 35% from 25%, and reduce the time scale of
this move to 12-18 months from five years.”
Analysts at RBS believe that even after the shake-out in
financial markets sparked by the political turmoil in Greece, the drive into
safe-haven assets has further to run.
“You’ve had a little smokescreen of the ECB liquidity
injection, but apart from this it’s been same the trade for two years - don’t
own any risky assets,” said Andrew Roberts, head of European Rates Research at
“The only difference now is that Asia is coming to the party
partly because its main export market is Europe.”
One thing that could change in the coming week is talk of a
more proactive stance from major central banks, especially if evidence grows
that Europe’s crisis is further clouding the US or Asian economic outlook.
Vanguard’s Westaway said that in the current environment it
is likely that firms and households everywhere are putting off spending
“They’re taking into account the possibility that something
really awful is going to happen, so the optimum thing to do is not to do
anything until the situation gets resolved.”
The first key signal could be the US Conference Board Index
of Consumer Confidence for May on Tuesday, which some expect to fall because of
April’s weak US jobs market.
The big data release comes on Friday with the US employment
report for May, expected to show a slight recovery with new jobs rising to 150
000 from 115 000 in April.
Of significance to expectations over whether the ECB will
ease its interest rates is likely to be the first estimate of German inflation
in May on Tuesday, eurozone inflation data on Thursday and a survey on bank
lending activity on Wednesday.