The PBOC’s Governor Zhou Xiaochuan pledged that his country will make an investment into Europe’s rescue funds and that it will maintain its positions in euro-denominated assets. The statements were sufficiently supportive to spark a small rally in the euro, gold, European equities and US stock futures early this morning. Interestingly, while the PBOC Governor spoke to his audience, the ECB issued a caution-laden comment on the topic of the regional debt crisis, in effect saying that those who expect the storm to be soon behind us might be sorely disappointed.
In fact, the latest news from Europe points to a further potential delay in the granting of aid to Greece (possibly to beyond that country’s April elections) — a delay that could see the March 20 deadline for euro bond repayments come and go. At that point the nuances between a “technical” and a “disorderly” default will become very difficult to distinguish.
It is as yet unclear whether the ECB was cognizant of certain fresh EU economic metrics when it issued its warning on the various systemic risks being faced by the region’s member nations (and, indeed, of other nations somewhat further away), but there is no denying that some of the figures released today would indeed engender more than a modicum of caution on the part of any observer, official or not. To wit, Italy, the union’s third largest economy, slipped back into recession in the wake of a second quarterly GDP contraction, while Germany — the engine of the region’s output — also experienced a contraction, albeit on a smaller scale of 0.2% in Q4 of 2011.
Overall, the European economy shrank by slightly less than had been anticipated in the final trimester of last year, but it did nevertheless contract by 0.3% and, more significantly, it experienced the first such slippage since the crisis days of 2009. On Feb. 13, Moody’s cut the credit ratings of six of the EU’s members. France managing to expand a tad and Germany’s better-than-anticipated decline in output stemmed the overall damage, but the situation still points to the fact that practically no one is out of the debt woods as yet. When it comes to the economy of Greece, well, that country’s GDP fell by 7% in 2011’s final quarter and by 6.8% on the year as a whole. It was the fifth year of recession for Greece and it is now being accompanied by a near-21% unemployment level.
Meanwhile, talk of Greece defaulting, or leaving the EU altogether continues to make the rounds in various political cabinets and market trading rooms on both sides of the ocean. Talks about the second rescue package have run into a snag and EU finance ministers opted not to meet on the subject matter but to hold a telephone conference call instead. Greek Finance Minister Venizelos warned that EU members are “playing with fire” when they float the idea that Greece ought to be jettisoned from the union. However, at least as 24/7 Wall Street.com sees it, the probability of either a default by Greece or a return by that country to its former currency of the realm remains high enough to warrant caution on the part of euro-bulls and speculators of similar ilk.
While “risk-on” flavored optimism was on display in various markets this morning, the US dollar’s losses were rather small. The greenback lost 0.3 to slip to 79.38 earlier in the day but then erased those losses and began to rally — it was last seen trading at 79.55 on the trade-weighted index, up 0.25% on the day. In the background, the euro was not reflecting too much in the way of enthusiasm by its buyers in the wake of the Chinese ‘nod’ and was quoted at just under $1.31 against the US currency.