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Prospects Weekly: Market confidence has been rattled once again

Global Macroeconomics Team's picture

Market confidence has been rattled once again following recent election results in France and Greece. However, credit default swaps rates, while up, remain well below their fall 2011 highs. Through March, retails sales have continued strengthening among both developing and high-income economies, although weakness still persists in the Euro Area. Notwithstanding the post-crisis appreciation in the currencies of several developing countries, in general, their currencies still remain below pre-crisis peaks.

 

Euro Area sovereign debt concerns have resurfaced once again. Following elections in France and Greece, the political landscape in the Euro Area has changed. The new French President-elect has indicated his intention to add a growth component to the EU fiscal treaty, while the Greek elections were inconclusive, and the influence of anti-austerity parties has increased markedly. These events, plus the announced bail out of one of Spain’s largest banks have rattled investors’ confidence once again. Credit default swap rates (CDS) have risen by 95.3, 37.3, 25.8 and 19.4 basis points in Portugal, Spain, Italy and France, respectively between 4th and 9th May. Among other Euro Area countries, CDS rates are up an average 5.2 basis points, but remain 116.5 basis points below their fall 2011 peaks.

Retail sales continue to strengthen across most regions. Easing inflationary pressures, rising employment strong credit growth, and in some cases lower policy rates have contributed to an up-tick in developing country retail sales volumes during the three months ending February (10.7%, 3m/m saar). The strength of developing-country domestic demand is also reflected in their import demand, which increased at a 19 percent annualized pace over the same period. In the U.S., improving labor market and consumer confidence conditions have boosted retail sales growth. Even in Europe, where consumer confidence remains low, retail sales expanded in March - the first increase in 5 months. Nevertheless, demand remains shackled by high unemployment and ongoing fiscal austerity. Looking forward, recent easing in oil prices could support real-incomes and further boost retail sales.

 

Despite substantial appreciations since the trough of the crisis, the real-effective exchange rates of many developing countries remain below pre-crisis peaks. Measured from post-crisis troughs the currencies of many developing countries have appreciated strongly (by more than 30 percent in many cases). However, measured on a longer-term perspective, the real-effective exchange rates of currencies of Indonesia, Brazil, Russia, India and Turkey remain below pre-crisis peaks. Among major middle-income countries, China’s Renminbi has appreciated the most. While capital flows have contributed to short-term volatility, the appreciation since 2005 among commodity exporters like Brazil, Indonesia, and Russia appears to mainly reflect higher commodity prices.

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