Europe Continues To Prick

Cyprus had been the epicentre of the recent global equity market downturn. Markets worldwide faced the worries of its bailout and then its bailout plans. In a highly dramatic fashion, drastic measures were taken to save the economy from bankruptcy. It however had markets getting nervous about the same measures becoming benchmark for other ailing European economies. This uproar was aggravated as Jeroen Dijssembloem, the Dutch head of the Eurogroup of euro-zone finance ministers first suggested the Cyprus bailout situation could serve as a template and then turned back on his own words. To provide some relief to the probability of such measures seeping into other economies, European Central Bank governing council member Yves Mersch said that this isn’t a template and that it is a set of specific measures applied to a very exceptional situation.

However, these comments failed to provide to any relief to European markets as developments in the UK and in Italy added to the problems of Europe. Reports confirmed that the UK economy contracted in the fourth quarter of 2012. A report from the Office for National Statistics showed the UK economy shrank by 0.3% in Q4 2012. Separate data showed a worsening of UK’s current account deficit to levels worst since 1989. Overshooting estimates, UK’s current account deficit came in at 57.679 billion pounds in 2012. This marks 3.7% of the GDP and a triple output, which is the highest share of output since 1989.

To add to the worries of Europe is the political uncertainty in Italy. The formation of a government has been questionable in Italy. The country’s Democratic Party leader Pier Luigi Bersani ruled out the possibility of forming a grand coalition with Silvio Berlusconi’s centre-right alliance. The alternative to a coalition is a minority government and that does not add a tinge to turn the instability in the country around. The political scenario in Italy has been increasing worries of a lack of leadership to drag the economy out of its troubled state.

Europe has been rather consistent at providing to negative sentiment to global markets. The US had a mix closing yesterday with the Dow and S&P ending the day lower by 0.23% and 0.05% and Nasdaq ending higher 0.14%. Europe however had an obvious bad trading day. The FTSE, DAX and CAC ended the day lower in the range of 0.18% and 1.15%. Asia too has seen a negative opening today. The Nikkei, Hang Seng and Shanghai Composite are trading lower by 1.12%, 0.33% and 1.18% respectively. The SGX Nifty opened lower by 8 points and has inched up and is now trading flat.

We expect these global developments to affect the Indian markets today. A strong and positive opening can be ruled out and a weak opening can be expected. At the same time, it is important to remember today is the F&O expiry. The market can make drastic movements due to the shorter week and expiry.