G-7 to Meet for Resolving Eurozone Crisis

 
on June 05 2012 4:08 AM

Crude oil initially declined further but then recovered as an emergency meeting among G7 leaders raised hopes on a resolution for the Eurozone crisis. Earlier in the day, sentiment was dampened amid speculations of a Greek exit from the bloc and Germany's Chancellor Merkel rejected a centralized system of bank recapitalization & Eurobonds. The front-month contract for WTI crude initially plunged to as low as 81.21 before rebounding to 83.98 at close. The contract rose for the first time in 5 days. The equivalent Brent crude contract initially plummeted to 95.63, the lowest level since August 2011, before settling at 98.85. Gold, however, eased on profit-taking after the rally last Friday.

As the market awaited the Greek election in mid-June, speculations about Greece's outlook intensified. Standard and Poor's stated it saw at least a one-in-three chance that Greece will exit the euro. The rating agency said that an exit could be brought about by Greece rejecting the reforms demanded and a consequent suspension of external financial support. Yet, S&P's believed that other sovereigns would be unlikely to follow any Greek exit, having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation as European partners would provide additional support to discourage further departures. Meanwhile, there were reports saying that China has studying the impact of a Greek withdrawal.

Ahead of the G20 meeting in mid-June, G7 leaders called for an emergency meeting today discuss the European debt crisis. According to Canada's Flaherty, the state of the European banking system, especially the Spanish system, will be in particular focus. Market sentiment was lifted by the meeting amid hopes that more concrete resolutions will be formulated. Yet, a compromise would not be easy as creditor countries, mainly Germany, and debtor countries, mainly peripheries, remained on very different stances. Germany's Chancellor Merkel supported the fiscal union which would be the first step for systemic banks to be supervised at the European level (such as the EU). Yet, she continued to reject the idea of joint European bonds. On the other hand, the Spanish Prime Minister Rajoy urged other EZ leader to develop a banking union in Europe for centralization the recapitalization of banks.

The RBA expectedly lowered the cash rate by -25 bps to 3.5% in June. Inter-meeting economic indicators suggested further weakening in Europe and some further moderation in growth in China. In Australia, both households and businesses exhibited a degree of precautionary behavior and is expected to continue in the near-term.

The Bank of Canada will leave the policy rate unchanged at 1% but likely deliver a much less hawkish statement after today meeting. The rapid deterioration in the global environment, especially the sovereign debt crisis in the Eurozone, is expected to affect he recovery outlook in Canada. Moreover, the slowdown in China should have negative impacts on the export sector of Canada.

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