Prime Minister Tsipras has moved quickly to form a coalition with a small party that is as fiercely opposed to the strict conditionality of the bailout terms as Syriza is. If anyone was in any doubt about what we’re going to be talking about in the weeks and months ahead, they should be disabused of such silliness now. On the other side of the negotiating table senior Eurozone figures have already made comments indicating that there will be little support for any moves by the new Greek government to seek debt write-offs. We’ve been down this road before and we have seen Eurozone leaders allow situations to approach the abyss in order to cow supplicants, I fear this could go down such a path again. And the euro has already been smashed around for months, it almost doesn’t bear thinking about, but this could get ugly. As I said yesterday, it would be really difficult for European creditor nations to back down from their stance as we have Spanish elections this year and Podemos is the the Spanish equivalent of Syriza in the most important issue. What’s good enough for the goose will surely be good enough for the gander! And that gander is a much much bigger economy with a whole magnitude more debt to renegotiate. Good luck with that!
Russian debt has been downgraded to junk by Standard and Poor’s yesterday night. This should be no surprise with the collapse of oil prices and the effects of sanctions devastating the Russian economy. But nevertheless the rouble has been hit hard closing at year to date highs of 70.84 yesterday versus the dollar. It has improved somewhat this morning but the market has only just opened. Give it some time…
It’s worth noting that some emerging market currencies have looked a little peaked recently. The naira trades close to its record lows in the inter-bank market on a 191 handle, and in the Bureau de Changes locally the rate is trading above a 200 handle these days. Elections are weeks away and no one can say whether the incumbent PDP or the APC will win this one. Incumbency is usually everything, but the coalition of Northerners and South-westerners is a potent combination indeed. If the APC loses again there could be protests and instability. If the APC wins federal institutions will be tested like they haven’t been since democratic rule was reintroduced. A bureaucracy exists on the back of PDP power, it could take ages before it is ready to cope with new political masters. Either way there will be instability of one sort or another. Watch this space.
Some hopeful noises from the Secretary General of OPEC.. “maybe prices have reached a bottom”. How inspiring! It makes me almost want to go out there and take a punt that we’ll see a sharp bounce from here. But perhaps there’s more substance to the comment. Certainly the Baker Hughes oil & gas rig count is now 20% below the October high. BHP, the Australian mining conglomerate, has recently indicated that it has shut down 40% of its US shale drilling rigs. Clearly production is getting taken out as a result of lower energy prices. This really does look like evidence the market is trying to find a bottom.
Moving on to other commodities, I mentioned copper some weeks ago, I should talk about iron ore now. Prices are now as low as they have been in over 5 years, slowing Chinese demand the main culprit. There really is nowhere to hide for commodity producers. Australia and Brazil are among the larger iron ore producers so I wouldn’t be surprise to see a continuing impact on the Australian dollar and Brazilian real from this in the longer term. I do however observe signs of positive divergence in AUD/USD at the present time, so a recovery of some sort might precede deeper declines in the currency pair. USD/BRL looks as if the opposite might be about to occur with significant Brazilian real weakness ahead looking increasingly likely to me. We shall see.
For now the impending financial repression of the ECB must combat the political noise coming out of Greece, something for everyone…
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