Financial markets struggled as sovereign debt problems in the
Eurozone returned to the centre stage. European bourses slid
although Germany and France suggested that the fiscal compact may
be completed by the end of January. Wall Street edged higher but
the outlook was not too bullish. In the commodity sector, the
front-month contract for WTI crude oil initially to slipped to
4-day low of 100.1 before recovering to 101.31 at close while the
equivalent Brent crude contract settled at 112.45 after plunging
to as low as 111.8. Both contracts recorded losses during the
day. Investors were also concerned about Greece, particularly
regarding the size and implementation of the PSI.
At the press conference after the meeting, Germany's Merkel
and France's Sarkozy indicated that the new 'fiscal compact' may
be concluded by the end of this month. The leaders again unveiled
the idea that a financial transactions tax can be implemented in
the Eurozone, if not over the EU. Moreover, both leaders stated
that they 'are ready to examine' ways to accelerate capital
payments into the European Stability Mechanism (ESM).
Regarding the situation in Greece, Merkel warned at the press
conference that there must be 'progress on the voluntary
restructuring of Greek debt' before additional financial
assistance and 'the second Greek aid package including this
restructuring must be in place quickly. Otherwise it won't be
possible to pay out the next tranche for Greece'. Yields in Greek
debts surged with the 10-year yields soaring +72bps to 35.66%.
The market was worried about the Greek PSI which the European
Union's Economic and Monetary Affairs Commissioner Olli Rehn said
discussions have entered the final stage. According to Rehn, the
level of discount to be accepted by creditors (the haircut) was
likely to remain at 50% as agreed in October. Under this scheme,
investors will voluntarily accept a nominal 50% discount on their
Greek bond holdings and receive a mix of cash and new bonds. The
market concerned about the eventual size and the acceptance of
this scheme as Merkel stated that 'the PSI is the precondition
that will bring Greece on its senses', though the PSI alone it is
not enough.
On the dataflow, Germany's industrial production slipped -0.6%
m/m in November, compared with consensus of a -0.5% drop and a
+0.8% gain a month ago. Eurozone's Sentix investor confidence
index improved to -21.1 in January from -24 in December last
year.