Financial markets struggled as sovereign debt problems in the Eurozone returned to the centre stage. European bourses slid although Germany and France suggested that the fiscal compact may be completed by the end of January. Wall Street edged higher but the outlook was not too bullish. In the commodity sector, the front-month contract for WTI crude oil initially to slipped to 4-day low of 100.1 before recovering to 101.31 at close while the equivalent Brent crude contract settled at 112.45 after plunging to as low as 111.8. Both contracts recorded losses during the day. Investors were also concerned about Greece, particularly regarding the size and implementation of the PSI.
At the press conference after the meeting, Germany's Merkel and France's Sarkozy indicated that the new 'fiscal compact' may be concluded by the end of this month. The leaders again unveiled the idea that a financial transactions tax can be implemented in the Eurozone, if not over the EU. Moreover, both leaders stated that they 'are ready to examine' ways to accelerate capital payments into the European Stability Mechanism (ESM).
Regarding the situation in Greece, Merkel warned at the press conference that there must be 'progress on the voluntary restructuring of Greek debt' before additional financial assistance and 'the second Greek aid package including this restructuring must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece'. Yields in Greek debts surged with the 10-year yields soaring +72bps to 35.66%. The market was worried about the Greek PSI which the European Union's Economic and Monetary Affairs Commissioner Olli Rehn said discussions have entered the final stage. According to Rehn, the level of discount to be accepted by creditors (the haircut) was likely to remain at 50% as agreed in October. Under this scheme, investors will voluntarily accept a nominal 50% discount on their Greek bond holdings and receive a mix of cash and new bonds. The market concerned about the eventual size and the acceptance of this scheme as Merkel stated that 'the PSI is the precondition that will bring Greece on its senses', though the PSI alone it is not enough.
On the dataflow, Germany's industrial production slipped -0.6% m/m in November, compared with consensus of a -0.5% drop and a +0.8% gain a month ago. Eurozone's Sentix investor confidence index improved to -21.1 in January from -24 in December last year.