Europe midday: Citi still sees high chance of Greek euro exit

Date: Monday 18 Jun 2012

-Markets looking out to possible release of audit on Spanish banks
-Investors looking out to Eurogroup meeting at end of week
-G-20 may announce stimulus measures, new IMF funding
-US and EU to decide whether to pursue new trade agreement-Bloomberg

FTSE-100: 0.22%
Dax-30: 0.70%
Cac-40: -0.09%
Stoxx 600: 0.10%
FTSE-Mibtel: -1.61%
Ibex 35: -1.65%

Europe´s main equity benchmarks have turned ‘mixed’ following this morning´s brief relief rally following the latest election results out in Greece over the weekend, which may have exorcized the worst of short-term fears regarding a possible disorderly euro-exit by Greece.

When looking out to the medium-term, however, some investors remain quite skeptical regarding the country´s future; particularly with respect to its prospects for remaining within the single currency.

Thus, economists at Morgan Stanley were commenting this morning that, “to the extent that a government willing to cooperate with Europe emerges, the probability of a near-term Eurozone exit, which we put at 35% over 12-18 months, will diminish – regardless of whether this government can comply with the conditions.”

A more pessimistic view seems to be that of economists at Citi for whom the risk of a so-called ´Grexit´ in the next 12 to 18 months continues to be at between 50% and 75%.

Be that as it may, investors are already looking out to this next Thursday. From that date onwards markets may learn the results of the private sector audit of Spain´s financial system. Following that financial markets will begin to ask authorities for greater details regarding any emergency funds for Spanish banks.

On top of that, negative research on Spain from Fidelity and Bank of America may be the cause of renewed weakness today on 10 year Spanish bonds. Yields on the same are now rising to the 7.13% mark, or by 26 basis points. Nevertheless, the low liquidity conditions are thought to be exaggerating the volatility.

Acting as a backdrop, the G-20 leaders assembled in Mexico are said to be prepared to announce new funding for the International Monetary Fund (IMF) and, possibly, new economic stimulus measures.

At least as important as the above, Bloomberg is commenting this morning on how, before the end of the month, US and European Union trade officials will recommend whether to pursue a free-trade agreement. That would constitute a very welcome (and free) boost to economic growth world-wide, but especially on both sides of the Atlantic.

Back on the subject of Greece, a coalition government is expected to be announced in the next few days, if not sooner. Nonetheless, it remains to be seen who will occupy the post of Prime Minister.

After that is resolved Greece is expected to return to the negotiating table with its international creditors in a bid to soften the terms of its aid package.

Lastly, towards the end of the week focus may begin to shift to the Eurogroup meeting that will lay the groundwork for the following week´s European summit.

From a sector stand-point the best performers now are: automobiles (1.73%), basic resources (1.6%) and construction stocks (1.5%).

Oil and euro rise slightly

Front month Brent futures are now down by 0.205 dollars, to the 97.41 dollar per barrel mark in ICE trading. Earlier in the day some reports cited Iranian President Ahmadinejad as indicating that his country is willing to halt nuclear enrichment at 20% if Europe provides it with nuclear fuel.

The euro/dollar is now 0.13% lower at 1.2630.

AB

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