18 DEC, 2011, 05.30AM IST, VIKAS AGARWAL,ET BUREAU
Last week, the European Union (EU) nations agreed to follow a stricter budget discipline going forward, to stop the sovereign debt crisis from spreading, and to strengthen efforts to come out of the crisis. This is indeed a positive move, but the end result will depend a lot on the actual implementation of the plans. Therefore, analysts are not reacting very positively but on the other hand tracking the developments in the Euro region.
The indications are that regional politics and inability to push strict austerity guidelines are making it worse with every passing day. The leading credit rating agencies are tracking developments in Europe and are threatening to downgrade the ratings of leading European nations. The uncertainty in the global markets is keeping investors nervous and away from risky assets. As a result, there is a lot of volatility in commodities as well as the currency markets.
These are some of the significant Euro zone factors that will have an impact on market sentiment in the short term:
Tight budgets
The leaders of the Euro zone countries agreed to impose strict budget discipline in order to fight the debt crisis and prevent it from spreading further. Analysts are tracking the progress in these measures. Although the leaders have agreed broadly, there is a lot of disagreement at the implementation level on strict austerity measures.
Investors are taking a cautious approach to investments in risky assets such as equity. The markets are therefore expected to remain range-bound with a negative bias in the short to medium terms.
Industrial production down
The recent data on the European industrial production showed a declined of 0.1 percent in October after a two percent drop the previous month. This shows the conditions are worsening in the region. The Euro region economy is slowly moving towards a double-dip recession.
The manufacturing data from Germany also showed a shrink for the third straight month in December, and analysts believe the situation is unlikely to improve in the near future as new orders' pipeline is not heavy.
UK unemployment rate worsens
The unemployment rate in the UK hit a 17-year high last week as the jobless rate climbed to 8.3 percent for the recent quarter from 7.9 percent reported in the previous quarter. The high rate of unemployment in the UK strengthened the concerns that the UK economy along with other Euro zone nations is also heading for a doubledip recession in the near future.
Bond auctions
Italy and Spain are going to face a tough test in the near future in the bond market as they are supposed to auction bonds of a sizeable amount. The recent deal with the European Central Bank has helped in securing lower yields during the recent bond auctions of these countries.
However, analysts are tracking the large-sized bond auctions expected in these countries in the first quarter of next year. Both the countries need to mop up huge amounts of money to honor their commitments on bond maturity. It is important to follow the developments around the bond auctions in these countries closely. A need for funding from the IMF is significant.
