Weekly review of world financial markets
Eurozone developments continued to drive markets and initially the euro and other risk-sensitive currencies were in danger of collapse, after Moody’s damaging reassessment of Spain’s creditworthiness sent Madrid’s borrowing rates rocketing into bailout territory.
However, the single currency soon bounced back, finding cautious support from investors hoping for a positive result in Sunday’s decisive Greek vote that could potentially shape the future of the eurozone.
Underpinning the more optimistic tone was a pledge by major central banks to take unprecedented measures should market conditions deteriorate quickly.
Europe - the week ahead
Results of the Greek election will filter through on Sunday night but the real impact on financial markets should come when European markets open on Monday morning. Any outcome that could jeopardise Greece’s future within the eurozone could place enormous pressure on the euro.
However, should a government in favour of sticking with austerity look more likely, analysts then expect to see the shared currency surge following months of relentless pressure.
The pound took another beating before a late rebound, dropping to May lows against the euro in spite of Europe’s widespread troubles after the Bank of England’s Mervyn King warned markets that extra quantitative easing is looking more and more likely.
The BoE also called into action an emergency liquidity scheme for banks in combination with a new government initiative to get money from banks into businesses.
In total, another £100bn will be pumped into the financial system in what seems to be a scramble to defend the British economy should Greece drop out of the euro.
UK highlights next week
The UK economic calendar will be overloaded with key reports that are more than likely going to reinforce sterling’s bearish outlook.
Bank of England minutes from the June 6-7 meeting will be the focal point, as investors seek clarity on when policymakers will loosen monetary policy again as Europe’s worsening financial landscape makes a return to growth for the UK economy evermore difficult.
The US dollar slumped to three-week lows on a trade weighted basis after more below par economic fundamental data releases strengthened expectations the Federal Reserve may soon act to prop up an economy clearly losing steam. Weekly jobless claims spiked unexpectedly and with data showing industrial output and consumer confidence sinking, traders began preparations for more dollar-negative asset purchases from the Fed.
US highlights next week
Initial direction for the dollar should come from Europe. If Greece elects a pro-austerity party then the buck could face a wall of selling pressure with investors likely to unwind safe haven stockpiles quickly before turning their attention to the Fed’s announcement on Wednesday.
Although the US central bank may refrain from a full-scale quantitative easing injection, it may embark on another unconventional project aimed at driving down borrowing rates like its recent Operation Twist venture.
The yen rose sharply towards the end of the week as anxiety amongst investors finally began to show before Greek elections and after the Bank of Japan decided not to introduce more stimulus measures at its monetary policy meeting.
At the same time, dovish comments from US and UK central bankers bolstered the yen’s safety appeal, taking the currency to one-week highs against its North American and British counterparts.
Japan - the week ahead
The Bank of Japan could still take action over the coming week to protect the fragile Japanese recovery from eurozone debt risks. If results from the Greek elections create more market panic, the BoJ may collaborate with other central banks to ease stresses in inter-bank lending.