Markets stabilise as Europe swings towards growth

Financial markets have stabilised overnight after yesterday morning’s initial sell-off from the results of the weekend elections in France and Spain. The consensus’ view seems to be that the election results will see a move back towards growth orientated policies and the markets have taken this as a positive sign. The situation in Greece remains unclear with no formal coalition formed at this stage, but markets are choosing to focus on the positives from France rather than worry about Greece again. Even the German Chancellor Angela Merkel said that growth and austerity could live side by side.

Going forward, if Europe does soften its stance on deficit reduction, focus will switch back to the interest rate markets which will be called on to fund the bigger deficits for longer. This could push longer term interest rates higher in the likes of France, Italy and Spain and lower in the now singular core of Germany. As a result of potentially higher yields, we may see the ECB pump more money into the financial system which in turn may weigh on the Euro.

For now the markets have calmed down and the NZD starts the day back at Friday night’s closing rate around the .7950 level and the attention moves back to domestic matters, with the New Zealand Government giving an update on their financial position ahead of the 24th May Budget. The government accounts are expected to show an ongoing shortfall due to declining tax revenue. Like most western governments, the New Zealand Government collect nearly 50% of their revenue from PAYE wages tax. Getting more people employed is the fastest way to improve the government’s finances. However, Bill English, the Minister of Finance remains focused on cutting government spending to curb the deficit. This reduced government spending, will act as a drag on growth over the next few years.

In Australia yesterday, retail sales for March were better than expected at 0.9% vs. an expected 0.2% and building approvals rebounded sharply 7.4% vs. 3.0% expected. Australia have trade data due today for March, with markets watching for a sign of a pick up in exports to China after several months of declines.

The ECB may print more if interest rates rise in France, Italy & Spain