/ 1 January 2012

Markets brace for eurozone turmoil in 2012

European shares and the euro will likely face more turmoil in 2012, after a year in which equity markets and the single currency slumped on fears over the eurozone debt crisis and the global economy.

Europe’s main stock markets dived by between 5.5 and 25% over the course of 2011, as traders set aside upbeat economic data and company results, while the euro has fallen 3% versus the dollar in volatile trading.

Yields on eurozone sovereign debt meanwhile rocketed in late 2011 as investors demanded top returns for lending money to the bloc’s most indebted countries such as Greece and Italy.

“Many will not be sorry to see the end of 2011, a year dominated by the crisis in the eurozone and fiscal austerity and one where most equity markets lost money,” said Schroders chief economist Keith Wade.

“2011 has been a disappointing year for risk assets all round. Buffeted by structural headwinds, major economies have struggled to build on the positive cyclical momentum from the end of 2010.

“The oil price shock, earthquake and tsunami in Japan, and more recently the eurozone debt crisis, have all played their part in interrupting the recovery that was expected for this year.”

In particular, the eurozone crisis dominated market sentiment in 2011 and is widely expected to be the main focus in 2012, overshadowing geopolitical strains and the race for the White House, dealers said.

The euro ended the year by briefly diving under $1.29 on Thursday to hit the lowest point since September 2010.

ETX Capital senior trader Manoj Ladwa predicted that next year will be broken up into a difficult first half — marred by the eurozone drama, a possible global recession and the faltering Chinese economy.

However, he also forecast that the second half would be boosted by the improving US economy and greater demand to hold equities.

“I expect another year of two halves. The first half could be tough — the eurozone is likely to dominate headlines yet again, with potential for Greece to exit the European Union, Italian bailout possibility and a recession. Also, China could struggle [with a] hard landing.

“All the above is likely to have an effect on global economies and we could witness a sharp sell-off in the first half as deleveraging and low growth becomes the norm.”

“But I expect the second half to be more positive. The US economy could show signs of stability and improvement,” said Ladwa, adding that equities demand would improve if interest rates remain low.

Over the past week, the single currency meanwhile plunged to a series of 10-year low points against the safe-haven yen as investors reacted to mounting economic uncertainty in the eurozone.

The euro slumped on Friday to ¥99.97 — tumbling under ¥100 for the first time since June 2001 in volatile pre-holiday trade.

Although the euro is set to end the year lower against the greenback, at the start of May it struck a 16-month high of $1.4940 owing to weak US economic data and as investors welcomed a bailout of indebted eurozone member Portugal.

In recent months, the euro and European stock markets have headed south as countries struggle to get to grips with the escalating debt debacle.

“2011 will be remembered for many things, but as far as the markets are concerned it’s the escalation of the European sovereign debt crisis that has dominated throughout,” said Simon Denham, boss of trading firm Capital Spreads.

“From the bailout of Portugal to the sights being set on Spain and Italy, unfortunately for them, the focus will remain on these bigger European nations who have so much in the way of debt to refinance in 2012.”

“Gains are hard to come by for the single currency as bond yields on the government debt of the peripherals remains stubbornly high.”

Among Europe’s main stock markets, Milan has been the biggest faller in 2011, losing almost 26% since the start of the year, as investors worried about a possible bailout of Italy, the eurozone’s third biggest economy.

London’s benchmark FTSE 100 index has shed 5.5% to about 5 572 points, with non-euro member Britain shielded to an extent from the eurozone’s crisis, even though the bloc remains its main trading partner.

Frankfurt has slumped 14.7%, Paris 17%, Milan 25% and Madrid 13.8% over the course of 2011.

“It was not the year we expected twelve months ago as the recovery faltered and the world economy stalled,” added Schroders economist Wade.

“We look for the [economic] cycle to take a more deflationary turn in 2012 as the eurozone falls into recession, dragging on global activity.” – AFP