The euro zone is starting to crack. The continent’s currency union has threatened to fall apart before, but this time looks serious. Conflicting rhetoric from politicians and central bankers isn’t helping.
As I’ve said before, a “Euro-split“ could cause major headaches for the whole globe. Now is a good time to stock up on aspirin. That leaning tower may finally be ready to fall.
Last week, I warned you about the Greek Tragedy set to Premiere Jan. 25. That’s when Greece holds snap parliamentary elections. Victory by the anti-austerity Syriza party could bring a long-feared “Grexit“ (Greece exit from the euro zone).
The next day, I ran some feedback letters about Greece (see Eurobanks in Denial) including one from Christos A., one of our Greek readers. He wrote:
If we want to return to growth, we must abandon the German political ideas. We have one month before the elections. [Some Germans may] support the Syriza party with the admission that ‘Indeed, Germany did make some mistakes on Greece.’
I wasn’t quite sure what Christos meant about Germans possibly supporting Syriza — but we learned over the weekend that German Chancellor Angela Merkel might be OK with Syriza taking control.
German media outlets reported that Merkel thought Syriza might win but did not fear it. She supposedly said Germany was prepared to handle a Grexit scenario.
Because this was hearsay, no one was quite sure whether to believe it. Others thought Merkel was trying to calm the situation by saying, in effect, “Move along, nothing to see here.“
Today, other senior German officials said no, Germany does not want Greece to leave the euro zone and is not planning for such an event.
That scared people even more. Almost everyone agrees the Grexit is a serious possibility and now the government of Europe’s largest economy says it has no plan for handling the fallout.
Hint to Merkel: Make a plan, Madam Chancellor. You can hope not to need it, but please be ready. Your continent needs you.
Just to make matters more complicated, European Central Bank chief Mario Draghi dropped more hints about deflation taking hold in the Eurozone, and all but promised to start a quantitative easing program, whether Germany likes it or not.
Disarray at the top is never a good sign. Traders see no reason to wait for the Greek election; they’re hitting the exits now. The euro currency tumbled against the U.S. dollar when Asian markets opened for trading today.
Crude oil followed, since economies in deflation don’t buy as much fuel. West Texas Intermediate went below $50 this morning.
The lower oil prices sent energy stocks down on Wall Street, setting off another stampede for the exits. It wasn’t a great way to start the year.
On the plus side, U.S. Treasury bonds did great. Every non-American on the planet wants his or her money in dollar-denominated assets. That pushed T-bond prices up and T-bond yields down. The 10-year yield fell as low as 2.044% today.
Gold prices also rose, though they still seem to like the $1,200 area. Why would gold rise on fear of deflation? Underline that word, “fear.“
Now not all fear is equal. People who are merely afraid are buying T-bonds. Those who are terrified want gold.
We don’t know how this will end. We could be in for several crazy weeks as the Greek election approaches and then afterward as the winners forge a governing coalition.
Meanwhile, action on this side of the Atlantic isn’t slowing down. Large institutions are working to place their new quarterly and annual allocations, earnings season kicks off next week, and the Federal Reserve might say (or do) something different at its Jan. 27-28 policy meeting.
Last month, everyone wondered how 2015 would start. Now we’re seeing the answer … and few people are happy with it.
The U.S. stock market opened to the downside and got considerably worse as the day wore on. Most equity benchmarks fell 1% or more. Since Friday was mostly flat, the market is off on the wrong foot this year. Here are some of the headline stories I see this afternoon.
- An unexpectedly mild German inflation report helped push the euro even lower today. Analysts had expected a 0.3% annual rise in consumer prices. The final report showed 0.1% instead.
- The energy and materials sectors led the way down in U.S. trading, which makes sense with so much “deflation“ talk in the air.
- The Energy Sector SPDR ETF (XLE), which holds all the S&P 500 energy components, sank 4.1% by the close.
- Cannibal bankers? A research note from Goldman Sachs (GS) said competitor JPMorgan Chase (JPM) should break itself into pieces.
- Goldman analyst Richard Ramsden said JPM’s parts are worth more separately than they are together and shareholders could win by dividing the holding company into four separate institutions.
- Don’t look for any such thing to happen. Goldman’s idea is completely opposite from what JPM Chief Jamie Dimon has done in recent years.
- We’ve all heard of “Too Big to Fail“ banks. Now, we have one that is “Too Big to Succeed.“
Good Luck and Happy Investing,
Uncommon Wisdom Daily