European markets were weak Friday as investors focused on the concluding day of a two-day European summit in Brussels. At the end of the first day of the spring summit, EU leaders gave provisional approval to a second bailout for Greece and also focused on structural economic reforms and other ways to combat record unemployment. Financials were thus among the top performers.
The FTSE 100 index closed 20 points weaker, down 0.3% at 5,911, while the FTSE 250 managed to break even, adding 3 points to close flat at 11,538. Both indices' daily performances on Friday mirrored their week-long moves, with the top tier sliding 0.4% over the five trading sessions and the mid-cap index managing a 0.1% rise.
In London, hedge fund manager Man Group (EMG) extended its strong gain Thursday on the back of solid results, rising 3.4% Friday, while Lloyds Banking Group (LLOY) and Barclays (BARC) took on 2.5% and 2.2%, respectively.
On the downside, Kazakhmys (KAZ) was the worst off, falling back to £10 per share, after announcing it is closer to finding a solution for its 26% equity stake in Eurasian Natural Resources (ENRC) but the valuation remains a stumbling block, according to Kazakhmys' chief executive Oleg Novachuk. Kazakhmys dropped 5.8%, while ENRC fell back 1.1%.
In other news this week...
ECB LTRO Auction Draws Significant Demand and German Ire
On Wednesday, the European Central Bank auctioned off over EUR 530bn to roughly 800 bidding banks in the latest long-term refinancing operation (LTRO). Combined with December's LTRO auction, the ECB has provided over EUR 1trn in funds to the region's struggling financial sector. This time around, the ECB lowered collateral requirements in an attempt to encourage small-to-mid size banks to participate. Typically, small-to-mid size banks have closer relationships and financial ties to the region's smaller businesses, and therefore, the ECB's move to reduce collateral requirements has been viewed as an attempt to boost lending to small and medium size businesses.
Thus far, the ECB's LTRO mechanism has proven very effective at lowering yields for distressed, peripheral eurozone members in the short-term. Following this second LTRO auction, 10-year borrowing rates for Spain and Italy fell below 5%. To many observers, the success of the second LTRO auction will largely be determined by how long yields remain at sustainable levels. Prior to the ECB's intervention in December, comparative yields on Italian and Spanish debt were regularly above 7%--a level deemed unsustainable by most economists. Following the previous intervention, yields plunged to below 5% before rising above 7% again a few days later on fears that structural reforms would have little effect or would fail to be implemented.
German finance officials have become increasingly vocal regarding Mario Draghi, the President of the ECB, and his LTRO policy. Jens Weidmann, head of Germany's Bundesbank, cautioned that the lower collateral requirements could threaten the reputation of the ECB. Lorenzo Bini Smaghi, a former ECB member, echoed these concerns by stating that the greatest risk the LTRO creates is the "disincentive for eurozone commercial banks to restructure their balance sheets and strengthen their capital base."
Eurozone Unemployment and Inflation Push Higher
Data released this week by Eurostat revealed that unemployment across the eurozone increased further than forecasted to a euro-era high of 10.7%. The labour market perfectly illustrates the increasingly perceptible fault-lines between core and peripheral member states. In Germany, unemployment remains lower than historical standards but did edge upwards to 6.8% in January. Despite the increase, the strength of the German labour market could not present a starker contrast with peripheral nations. For instance, Spain's unemployment rate rose to a crippling level of 23.3% with youth unemployment approaching a staggering 50%.
In conjunction with rising unemployment, inflation across the eurozone rose to 2.7% in February higher than most forecasts due to rising Brent crude oil prices. Recently, Brent prices have risen due to concerns about Iranian oil exports in light of the EU's pending embargo and Iran's threats to blockade the Strait of Hormuz. Despite signs of incipient confidence for eurozone consumers in the past few weeks, the deteriorating job market, increasing inflation, and rising oil prices pose a difficult set of obstacles to overcome if consumer spending is to increase meaningfully.
US Consumer Confidence Increasing, Though Risks Remain
On Wednesday, both US GDP and personal consumption for the fourth quarter 2011 were unexpectedly revised upwards to 3% and 2.1%, respectively. The growth in personal consumption was fueled by a 7.5% increase in consumer borrowing--more than twice what economists had forecasted. The fact that the US consumer is resorting to credit to boost their consumption indicates increased confidence in the state of the US economy and the improving domestic labour market. Almost on cue, the initial jobless claims figures released on Thursday managed to beat expectations again, falling to 351,000 despite economists' predictions for a rise to 355,000.
Supporting the hard data released this week, consumer confidence surveys published by the Conference Board and the University of Michigan confirmed an upward trend in confidence as well. According to both reports, confidence levels are at one-year highs.
However, despite broad indications of increased consumer confidence and a healthier labour market, Ben Bernanke, Chairman of the US Federal Reserve, revealed his reservations about the state of the US economy in his monthly press conference. Bernanke reiterated that, "the fundamentals that support spending continue to be weak: real household income and wealth were flat in 2011 and access to credit remained restricted for many borrowers."
