June will be a turning point for the Eurozone

By Sara Carbonell

Date: Friday 01 Jun 2012

The month of June may prove to be a crucial turning point for the future of the Eurozone following a series of important events that are scheduled to take place. The analyst consensus is clear:

"There’s a culmination of stress that’s building," said JP Morgan chief economist Bruce Kasman. Meanwhile, Mark Zandi, the chief economist at Moody's Economy.com, thinks that "We’re going to get a lot of clarity on a lot of big issues."

What exactly is expected to take place?

June 1st saw the release of the US Employment Report for May, which sent equity markets tumbling after its release on Friday. Following the ceiling of 275,000 jobs created in January, the US labour market has been slowing down rapidly; in April, only 115,000 jobs were created and just 69,000 were generated in May.

Next week, on June 6th, the European Central Bank will hold an interest rate decision. Robert Sinche, global head of currency strategy at RBS, believes that the weakness in the latest data in Germany may pressure the central bank to adopt new measures: "I think the question is whether policy makers are going to start bending again," he said.

One day later, on June 7th, Federal Reserve (Fed) Chairman Ben Bernanke will address Congress. Analysts will look closely to any hints of action that may be taken at the Fed’s next rate meeting.

June 17th, will be arguably the most important event of all - Greek presidential elections. Greek citizens will head to the polls to decide the country’s new government. "The June 17th election is not going to determine a Greek exit but it could set in motion things that do. We’re going to have to watch how it plays out," said JP Morgan’s Kasman.

The results from the latest poll show that the left-wing Syriza would take 31.5% of the votes, followed by New Democracy with 25.5%, and PASOK with 13.5%, according to Greek daily Kathimerini.

Immediately afterwards, on June 18-19th, the G20 summit will take place in Mexico where discussions will undoubtedly focus on the European debt crisis.

On June 19-29th, the Fed’s Open Market Committee will decide on interest rates. Investors will be anxious to know if the Fed finally decides to launch more economic stimulus sooner rather than later.

Gerring Wealth Management founder Eric Parnell believes that the Fed will intervene with a second "Operation Twist" since it would leave its balance sheet unchanged and would be the less controversial move politically.

Parnell points out that the "Operation Twist" launched in October, which exchanged around $400bn in short-term bonds for longer-term debt, will conclude in late June.

"Since the beginning of the financial crisis, the stock market has responded poorly once these Fed stimulus programs have come to an end. Back in 2010, the stock market dropped by 15% in just four weeks and a total of 17% in eight weeks not long after the end of QE1 on March 31st (…) In 2011, the stock market plunged by 18% in just two weeks following the end of QE2 on June 30th."

To close out a busy month, an EU summit will be held on June 28-29th, which may finally produce some real decisions on matters such as Eurobonds, economic growth measures, and the fiscal pact.

A big month awaits, let the fun begin.

SC

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