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Eurozone Brinkmanship

Financial markets have entered an unsettling period as Athens and its creditors determine the future of Greece and the eurozone.

When the euro crisis started in late 2009, it was in Greece that the prologue of the monetary union’s debt dilemmas first unfolded. Half a decade later and the victory of the far-left Syriza party in the Greek election marks the start of the next episode in the unresolved debt crisis. With its new populist leader, Alexis Tsipras, promising to cancel the nation’s debts and increase public spending, Greece is again the setting for what looks like the denouement of this five-year drama. The outcome of Greece’s anti-austerity stand, for now, is in the balance; but what is certain for investors is that financial markets have entered an unsettling period as a defiant Athens and its uncompromising creditors, locked in brinkmanship, determine the future of Greece and the eurozone.

Financial markets remained broadly composed in the aftermath of the Greek people’s rejection of austerity, although the sangfroid looked strained by the end of the week. The European Central Bank’s (ECB) decision the previous week to adopt a €1.1 trillion asset-buying scheme provided initial ballast for markets. However, global stocks dipped and government bond yields, which move inversely to prices, headed lower on Friday, after Greece’s finance minister, Yanis Varoufakis, pledged to roll back economic reforms and not to co-operate with the ‘troika’ of lenders – the International Monetary Fund, ECB and European Union (EU) – that has overseen the bailout since 2011. Greece is set to reject an extension of the programme later this month, which would shut off its banks from ECB funds.

Resurgent greenback

While unease gathered over this next act in the eurozone’s debt crisis, markets turned their attention to the US Federal Reserve and when it will increase interest rates. Although the Federal Open Market Committee’s first statement of the year talked of the “solid pace” of the recovery, growth in the last three months of 2014 slowed to an annualised rate of 2.6% from 5% in the previous quarter, due to weak business investment and pressure on exporters from a stronger dollar. However, US growth remains underpinned by improved employment conditions. Falling oil prices have boosted household income, while pushing inflation further below the 2% target. The Fed is looking for a pick-up in wages and inflation to prepare the ground for higher interest rates; but an increase is not expected before June.

Time for action

Eurozone QE will support the UK recovery and corporate earnings, which, of course, is to the benefit of Britain’s investors. Although estimates last week suggested that the UK’s buoyant economy lost a little momentum in the fourth quarter, Britain’s annual growth of rate of 2.6% is the fastest of any major economy – and the best annual performance since 2007. The service sector continues to drive much of this growth, while construction and manufacturing lag. But the fall in oil prices and energy bills and the price battles among the supermarkets are putting money into the pockets of UK consumers. The EY ITEM Club believes increased consumer spending power will boost economic activity, while purchasing managers are expected this week to indicate increased activity in the first month of 2015.

A key question for investors is whether the fall in oil prices will lead to households paying off the mounting personal debt or increasing their spending. Economist Azad Zangana of Schroders believes households will spend most of this windfall, which will boost retail sales and further accelerate UK growth. “Meanwhile, with inflation likely to turn negative in coming months, there seems to be little appetite within the Bank of England to raise interest rates in the near term,” adds Zangana. However, Mark Carney, the governor of the Bank, has suggested that short-term moves

in inflation will not delay for long a rise in interest rates. Indicators point towards an increase before the end of 2015.

Long-suffering holders of cash on deposit will have to accept that rate rises will be low and gradual. In the meantime, the focus for UK savers and investors is the general election. Of course, there is uncertainty over the direction that policies will take after May – and what is in store for the UK’s relations with the EU (and the outcome for the eurozone of the Greek crisis). Investors can expect a period of volatility, but those who hold a range of assets should look beyond any turbulence to the long term. But, with savers and investors mulling over the changes to pensions in the UK – and a 30% increase in their annual ISA allowance – there is one certainty to act upon: the tax year-end on 5 April. Now is an opportunity to review and make use of allowances and exemptions and plan for the future.

Words by Tom Williams. Tom has vast experience in trading the Forex markets and is a qualified financial advisor. With expertise in wealth management, retirement planning and inheritance tax planning, he regularly advises on how to maximise personal wealth. 

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning contact Tom Williams on 0777 910 5434 or email tom.williams@sjpp.co.uk.

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