10.02.12 Friday Morning

As Europe froze this week Greece felt the heat as the latest instalment of austerity measures took place. After days of talks news was released Thursday afternoon that Greek political leaders had finally reached an agreement on further austerity measures needed for the country to receive its next bailout and avert default in March. This news, released prior to the euro-zone ministers meeting in Brussels, caused the Stoxx Europe 600 index to rally mid-afternoon and finish slightly up on the day. However, euro-zone finance ministers demanded more steps and a parliamentary seal of approval before providing the aid to Greece. A string of broken promises has left the IMF exasperated over the 130Bn euro bailout with weeks of disagreement leaving little time for Greece to avoid defaulting. The problems for Greece hightened as union strikes took place on Tuesday against the latest raft of cuts being undertaken by the government. These cuts focussed primarily on the public sector with the IMF pressing for a reduction in the minimum wage among others. Ministers have given the debt ridden country till the middle of next week to find an extra 300mln in savings with part of the gap to be filled by cuts in defence spending among others. Greece is currently in its fifth year of recession with unemployment levels of 20%.

Away from Greece there was positive news for the euro-zone with the Euro strengthening to above the 1.33 mark against the Dollar. This was due in part to renewed hopes about Greece but also because of the Euro Sentix investor confidence data, a key figure of economic health, which was greatly improved at -11.1, exceeding the -14.8 forecast. The combined debt of the 17 euro-zone governments fell as a percentage of economic output in the third quarter of 2011, although it rose in all three members that have been forced to seek a bailout. The debt of the 17 euro-zone governments stands at 87.4% of GDP, down from 87.7% for the prior quarter; there is a great variation between states though with Estonia’s debt at 6.1% whilst Greece’s is an eye watering 159.1%.

With the focus on Greece other European countries were quiet with the main news the BoE’s decision to add £50bln of quantative easing aimed at driving demand within the economy. On the continent Germany held a reasonably successful bond auction and Italy announced that its GDP fell more in Q4 than Q3, down 0.2%, they predict that no improvement will be seen in Q1 of 2012. Outside of Europe Iran announced that it will cut oil deliveries to ‘hostile’ states as sanction pressures start to bite; Light Crude was seen up a couple of dollars. China pledged to support first time buyers and create an astonishing 45 million new job whilst Japan added that despite a strong Yen consumer confidence was stronger than expected.

With Europe the focus America has been quiet this week with the Dow steadily strengthening to its highest level since 2008 with corporate profits cited as the reason. Consumer credit jumped to $19.3bln causing economists to analyse whether more quantative easing is really necessary. Attention turned Bernanke’s testimony where in brief he stated that a substantial European crisis would hurt the US, the US fiscal path is unsustainable and needs to be readdressed, the 8.3% jobless market understates labour market weakness and finally that expiration of Bush tax cuts would cut growth. America did report a cut in unemployment claims, down to 359K.

In equities the markets attention was on the merger of Xstrata and Glencore. Xstrata shareholders are being warned off opposing the deal as they have no realistic alternative. If the deal falls through Xstrata would be left with limited option including shares buy-back scheme or a sell of assets. More bad news followed for Xstrata with earnings coming in just light of expectations. Aside from Xstrata, BP revealed Q4 pre-tax profit of $11.2bln with raised dividends as momentum returns to the company, Randgold Resources announced record profits, International Power recorded earnings up 8% but BHP Billiton announced a fall in earnings as they missed targets.

The British retail sector revealed it was the 2^nd worst January on record. Supergroup reported Q3 retail sales were up 27.8% but have been downgraded to sell causing a further sell off of the stock. Thomas Cook was encouraged by bookings in the New Year but expect the rest of the year to be challenging.

In America UBS reported a larger than expected 76% drop in net profits for the fourth quarter prompting a gloomy outlook for 2012. New chief executive Sergio Ermotti slashed bonuses in the investment banking division by 60% and 40% across the group in order to convey the message that employees were to shoulder at least part of the blame instead of passing them onto shareholders.

CPI and RPI are released Tuesday morning followed by German Economic Sentiment. In the afternoon US retail sales data is due at 1330GMT. On Wednesday we have UK claimant count number and the BoE inflation report is released. Thursday is quiet in Europe with Building Permits, PPI and Unemployment Claims data out from the US at 1330GMT. Friday sees retail sales from the UK and Core CPI from the US. Earnings reports come from Barclays on Wednesday, African Barrack Gold, BAE Systems, Kingfisher and Cable and Wireless on Thursday. In America no Dow Jones firms report.

See our Economic Diary here.