Riskier asset rebounded today as market participants celebrated the potential assistance by the EU to the European countries that are having fiscal issues. Yields on Greek and Portuguese debt narrowed relative to German yields and the Euro rallied 1.5 big figures to end the trading session at 1.3786. The US equity markets also had a nice bounce back rally, as the S&P 500 Index closed up 16 points or 2% TO 1072. The Petroleum markets continued to rally, with crude oil moving up $2 per barrel and gasoline increasing by 4 cents per gallon.
All eyes are now on the meeting of 27 national leaders, set for Thursday at the EU. Few observers say that the other euro-zone countries would let Greece simply default, but concerns over whether any aid would be needed, and if so how much and how soon, have jolted stock, bond and currency markets. Nervous investors also fear the Greek troubles could spread to other indebted nations, such as Portugal or Spain.
On the economic front, Germany reported a better than expected December trade surplus but while the data looks good on the surface at EUR16.7 bln, it underscores a key source of tension in the euro zone. Officials from the major countries have long discussed the need to address global imbalances. These imbalances also exist within the euro zone itself. The German commitment to its export sector has enabled the country to export roughly 40% of its GDP (roughly in line with China). However, its successful hyper-competitiveness also forces other countries such as Greece to run trade deficits. The German seasonally adjusted trade surplus narrowed just EUR0.3 bln from EUR17.0 bln in November led by a 3.0% m/m gain in exports (vs. 1.1% in November), more than offsetting a 4.5% gain in imports (after a downwardly revised -6.5% drop.) That’s in contrast to the November Greek trade deficit which widened to EUR2.4 bln from EUR2.3 bln in October with exports slipping 6.0% while imports fell -1.3%. Today’s Greek Dec industrial production data also deteriorated falling 3.7% m/m and 7.6% y/y (vs. -6.1% in November.)
In contrast to Germany, the UK unexpectedly recorded a wider than expected trade deficit in December despite the weakness of the pound. The December visible trade deficit widened to GBP7.23 bln vs. GBP6.7 bln expected and from GBP6.8 bln in November. Additionally, the trade deficit with non-EU countries deteriorated despite evidence of growth in China and the US. The non-EU deficit widened to GBP3.5 bln from GBP3.1 bln. Some of that widening may be due to one-off factors. Imports from non-EU countries jumped 7.6% as aircraft orders and oil rose. Still, on the export front, the ONS reported that total exports in 2009 fell by the most on record or 9.5% y/y.