It cannot have escaped the attention of many people that the parliamentary election in Greece last month has been causing something of a commotion across much of mainland Europe. Since polls closed on January 25th, and the far left party Syriza emerged with 149 of the 300 parliamentary seats – just two away from an absolute majority – economists from across the globe have been looking to Europe in an attempt to explain just how this outcome may affect the future of the Eurozone.
First, let us look at the origins of the European currency union itself, and the underlying causes of the disputes that we see today.
Syriza and the Single Currency: Background to a Debt Dispute
When the European Union (EU) was established by the Maastricht treaty in 1992, a currency union was at the heart of the agreement. The idea of a single currency was to promote trade and industry across borders, and expand the free market. In practise, however, the single currency lent itself to export economies such as Germany, who were able to sell their goods abroad whilst retaining an artificially low currency. In essences, the smaller economies acted as ballast that would allow larger nations to sell their goods at a competitive price. Conversely, smaller economies began to struggle with prices rising faster than their nations had historically been familiar with, leading to poverty, stagnation, and large scale migration of workers.
When the effects of the credit crunch began to hit all of the world’s economies in 2008, austerity measures were seen as the safest initial response to secure markets and re-introduce stability. However, for the smaller nations who had been struggling just to retain their existing standards of living during the good times, the austerity economics of the past seven years have hit even harder. It is to a backdrop of widespread unemployment, benefit cuts, and lost pension entitlements that the anti-austerity Syriza party emerged in 2012.
Cause and Effect: The Greek Election Outcome
So who are Syriza? And how have they managed to capitalise on the market turmoil within the Eurozone, and the fall of the value of the Euro?
What is now the largest party in Greek politics began in 2004 as a coalition of 13 disparate, far left organisations. The radical, anti-establishment identity that Syriza held in its formative years enabled it to capitalise on the broad anti-austerity sentiments that were felt throughout much of Europe following the global financial crisis. In 2012, Syriza established itself as a single, unified political party, with a more moderate set of principles that focused primarily on civil rights. Amongst its key platforms were an end to strict anti-terror laws, and a reversal of the harsh cuts imposed on pensions and welfare.
With its populist manifesto, commentators have been predicting a Syriza victory as far back as May 2012. Yet the result has nevertheless been met by the rest of Europe with something almost like surprise.
The European Union’s failure to address the emergence of the new political power in Greece should itself be interpreted as part of a strategy for containing the repercussions of The Syriza Effect. Staying the course and offering no concessions has been the mantra of the political establishment thus far.
It is not hard to see why: the Euro has already plummeted in value against world currencies, and investors’ confidence in both the Eurozone economies, and the currency union itself, has never been lower. Appearing to appease the anti-austerity movement in Greece would only provoke fears of greater instability. Yet the victory of Syriza in Greece makes confrontation inevitable. A failure by the European establishment to act now will foment the very doubt that it has been so careful to minimise until now.
Long Term Solutions: Compromise, Negotiations, and a Chance for Resolution
So the dispute has its two sides: the European Establishment on the one side, including the European Central Bank (ECB), Germany’s Angela Merkel, and Britain’s chancellor George Osborne; and on the other, the popular anti-austerity movement of Greece, which enjoys grass-roots support in Spain and Ireland.
The first glimmer of hope for a compromise is the relaxation of the anti-Euro rhetoric coming from the Syriza camp. The party’s MEP, Dimitrios Papadimoulis, has asserted that Greece’s future lies in the currency union, and that the nation has no desire to become the basket case economy of the Eurozone.
There is a case for compromise. Alongside the single currency outlined in the Maastricht treaty, a number of other core values were set into European law at the same time. These detailed the required levels of national debt and the repayment requirements that were necessary for the union to operate with sound finances, and for nations to be eligible for membership. But since the 2008 credit crunch, very few EU nations have adhered to these targets – even amongst the powerhouse economies. As such, much of Europe has been failing to live by its own rules for the past seven years, and its position for negotiation is weakened because of it.
This is a fact compounded by the ECB’s own decision last month to begin a programme of quantitative easing within the Eurozone. Whilst the newly printed money will provide liquidity to the markets, it at once adds debt to the balance sheets of individual nations, and simultaneously dilutes the value of the Euro in your pocket. The €1.1 trillion total valuation of the scheme dwarfs the €315 billion of debt at the centre of the Greek stand-off.
On Feb 20th the European Institutions gave a lifeline to the Greek government in the form of a four month extension of the Feb 28th deadline. The extension came on the condition that Greece will implement a comprehensive reform plan which will be presented in its entirety in April.
On Monday Greece illustrated the main actions it will undertake to meet the new June deadline for the €7 billion installment, including the pursuit of tax evasion and a spending review.
There is then both a legitimate case, and a prevailing mood, for compromise as opposed for confrontation. Some would argue, there is also now a certain level of necessity, too. Tsipras had to come to terms with the situation and hasn’t ventured too far from what Samaras (his predecessor) had agreed to put in place. At the same time Greece has regained control of its fate and will be able to make or break its immediate stance on the international board within the next four months.
This article is brought to you by Hantec Markets
Cryptocurrencies: the new gold?
By Gerald Moser, Chief Market Strategist, Barclays Private Bank
Time to add to a portfolio?
There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.
While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.
And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.
Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.
The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.
Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.
In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.
An inflation hedge?
Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.
Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.
Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.
From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.
Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.
Cryptocurrencies are here to stay
Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.
And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.
Energy stocks drag down FTSE 100, IG Group slides
By Shivani Kumaresan
(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.
The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.
Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]
“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.
“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.
British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.
IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.
Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.
Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
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