Oil Higher After Support on Greek Debt
Oil prices topped $80 per barrel in New York as the European Union"s aid package for Greece was welcomed by traders and investors. At the same time, the market is waiting the U.S jobs data later in the week. But the top story for oil market these days is the agreement between the Eurozone leaders to support Greece. This decision brought investors back to the oil market as the dollar fell against the euro following the International Monetary Fund and European Union pledge to help finance Greece"s debt. Investors buy commodities as the U.S. currency declines to offset inflation concerns.
According to analysts ?the connection between Greece and the oil market is via the euro-dollar exchange rate,?. That means that during the last weeks the Greek debt problem was the main reason for a stronger dollar, something that does not support oil prices. Oil has advanced 3.6 percent in the first quarter, peaking at a 15-month high of $83.95 a barrel on Jan. 11.
It is worth mentioned that according to OPEC analysis, Greece debt problem was the main worry for the European economy. According to its latest Monthly Oil Market Report OPEC"s analysts underline that the situation in the Euro-zone has not improved significantly in the recent weeks. While the Greek dilemma seems to have been resolved for the short-term, the long-term effect and its outcome is still unknown. For now, the issue seems to be contained after the EU has voiced its support for Greece and the government announced deep budgetary cuts.
The current support of the EU for Greece comes with a demand for tough measures to improve its budgetary situation. Greece won a crucial vote of confidence from financial markets recently when investors widely supported a government bond issue on easing fears that the debt crisis could prevent Greece from raising money. In this recent bondissue, Athens sold ?5bn in 10-year bonds and managed to receive orders for three times that amount.
However, the interest rate the country has been forced to pay to attract this investordemand is among the highest Greece has paid for a 10-year bond since it has joined the Euro-zone in 2001. The interest rate on the bond was 6.25%, about 2 percentage points more than Portugal ? which is widely acknowledged as the next weakest Euro-zone country after Greece ? and double the rate which Germany is currently paying for matching maturities. Greece now seems to also seek assistance from the IMF, while some of the Euro-zone member countries oppose such a step and would therefore like to bring forward the creation of a Euro-zone Monetary Fund (EMF).
Adding to the weakness of the Euro-zone have been recent lower-than-expected output numbers. The Euro-zone 4Q09 GDP was up only by 0.1% q-o-q seasonally adjusted (sa). This number was unexpectedly lower, while a low number was already indicated by recent industrial production and order numbers. Germany"s GDP was recorded stagnating, but better than some have expected at declining levels. France was again leading the Euro-zone as the second-biggest economy with a growth rate of 0.6% q-o-q sa. Spain, Italy and Greece were all negative at minus 0.1% q-o-q, minus 0.2% q-o-q and minus 0.8% q-o-q, while Portugal also stagnated. The major reason why growth was flat compared to the previous quarter was that government spending declined at minus 0.1%, compared to 0.8% in the 3Q09 and 0.6% in 2Q09.
While Germany"s recovery seems to have come to a halt, business confidence surveys have shown optimism continues to rise. The Bundesbank president just recently had warned that the severe winter weather could have hit growth at the start of this year, but indicated that the recovery is on track, which was also reflected by strong exportnumbers for December, which increased by 3.0% m-o-m, compared with 1.1% in November. This was the fourth consecutive rise. In contrast, a GDP level of 0% q-o-q indicates the very weak domestic demand picture and the high dependency of Germanys" growth on exports. At the same time, the fiscal problems of some southern
Euro-zone countries have added to uncertainty about the outlook. The necessary and ambitious government programmes to reduce budget-deficits in Spain, Portugal and Greece are likely to dampen growth this year.
Unemployment seems to remain a big issue for the Euro-zone, holding back consumption and therefore, growth. The Euro-zone unemployment rate remained at 9.9%, slightly below the 10% threshold for the second consecutive month in January.
Germany seems to be fighting unemployment relatively successfully by keeping the rate at 7.5% for the fourth consecutive month. Levels in Spain have come down by 0.1% for the second time to a level of 18.8%, after having peaked at 19.0% in September 2009.
Concerns about youth unemployment has not abated. It was recorded at a level of 20.2% for the third consecutive month. Spain in this category was again hitting a new peak-level at 39.6%, 0.2% higher than the recent peak in November 2009 at 39.4%.
Correspondingly, retail sales in the Euro-zone were down by 0.3% m-o-m in January, after increasing by 0.5% in December. This pattern has further added to the volatility in retail sales which could have been observed over most of the recent months, indicating that there is still no clear trend and consumers seem to still lack the confidence to spend.
Non-food products were hit hardest, declining by 0.6% m-o-m. The weak consumer market is being reflected further on in the Consumer Price Index (CPI) numbers for February, when inflation was recorded at 0.9% y-o-y, which is 0.1% lower than the corresponding January number at 1.0% y-o-y. On a monthly basis, inflation was already declining in January, when it was at minus 0.8% m-o-m.
Considering muted growth combined with declining price levels, any early exit from the current low interest rate regime of the European Central Bank (ECB) seems to be remote, despite efforts to press ahead with the dismantling of its emergency support for financial markets. The ECB president recently unveiled fresh steps to return the bank to its previous system for injecting liquidity into the financial system and restrict the occasions on which it meets, in full, banks' demands for funds. Furthermore, he said market conditions were returning "progressively to normal" and he voiced concern that delaying implementation of its "exit strategy" could distort investors' behaviour and sow the seeds of a future crisis.
The ECB kept its key interest rate at its latest meeting at 1.0%.
Recent industrial order numbers were up 0.8% m-o-m in December, although this was lower than the strong November figure of 2.7% Additionally, order numbers in Germany declined by 1.8% m-o-m, while France"s order numbers were up 17.1% m-o-m. This could be important as the industrial output numbers for December have been negative in France at a level of minus 0.1% m-o-m, lower than consensus expectations.
Manufacturing production even declined by 0.6% m-o-m in France for December. Given that the Euro-zone recovery is still relatively fragile, the GDP forecast for 2010 remained unchanged at 0.6%, while the 2009 number has been lowered to 4.0% from 3.9% previously.