Situation in the US remains relatively better than the European
Markets continue to show deep concerns over a potential shock from Greece exiting the Euro zone and the systemic ramification.
A report prapred by the National bank of Kuwait (NBK) said the flow of negative news remains relentless and fears of markets meltdown continued throughout the week.
Credit rating agency Moody’s added to the pressure on Thursday by downgrading sixteen Spanish banks.
Fitch rating agency joined the party by downgrading Greece to CCC from B- citing political uncertainty over the country’s commitment to a crucial bailout and possible exit of the Euro zone. Fitch warned that if a new government did not support the bailout, it was likely Greece would leave the Euro zone, default on its debt and potentially spread the risk to the other European members. Negative news on Greece continued with The ECB stating that it was no longer dealing with some Greek banks via the conventional credit window, and has restricted the banks to “emergency lending assistance” from Greece’s central bank. There was however, some positive news and hopes with Greek polls showing New Democracy had a small lead over Syriza, which may bring a pro austerity coalition into power on June 17, according to the report.
On the other hand, according to the last minutes of the FOMC meeting, the US Federal Reserve officials were not confident to upgrade their assessment of the economy as several members said more easing could be needed if momentum slows. Members wanted to be more confident that there had been a significant upturn in the economic outlook before making changes to the central bank’s guidance that rates will stay low until late 2014.
Although the situation in the US remains relatively better than the European situation, the deceleration of Chinese growth, and the debt crisis in Europe could lead to the Fed engaging again into another wave of asset purchases to sustain the economy.
The NBK report stated that it is important to keep in mind that the US dollar fell after QE1 and QE2, but not after Operation Twist, and it is likely to remain supported as long as the Fed is not expanding its balance sheet. There will be a much greater risk of balance sheet expansion if financial dislocations in Europe materialize in the next coming months, otherwise, further Fed action based on a weaker economy might not involve balance sheet expansion.