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Market Update

Market Update

The Chinese lunar New Year holiday has effectively shut down most of the Asian stock markets today, which could be seen as a positive given the ongoing failure of Greek debt restructuring talks. Discussions are believed to have failed over the weekend, but there is due to be a teleconference with investors today. Those close to the discussions suggest that a haircut of around 70% is currently under discussion, which is significantly higher than the 50% demanded. This probably explains why we are seeing some hold outs at the moment. EU Finance Ministers are due to meet in Brussels after markets close and are expected to be dominated by the Greek debt-swap agreement. There had been hopes for an agreement over the weekend and time is certainly beginning to run out to avoid a default on 20th March when debt repayment is due.

Finance Ministers were originally due to meet to discuss implementing the fiscal pact and allow for the setting-up of the permanent ESM one year ahead of schedule. However, as has been usual in most recent summits the failure of EU leaders to come up with the comprehensive solution on sovereign debt issues means that new progress is unlikely to be made.

The shadow hanging over Greece combined with a dearth of data will leave stock markets with little direction today. French business confidence fell in January, confounding expectations of an increase and it is now back at lows last seen in February 2010. The Advance estimate of Eurozone consumer confidence is expected to also show a further deterioration with the expected 0.3pp dip to -21.4, putting confidence back at levels last seen in August 2009, confirming the shallow recession that we expect the Eurozone to experience in the six months to March 2012.

If finance ministers are constrained, EU foreign ministers have reportedly agreed on an Iranian oil embargo. Given that the Iranian government have previously claimed that they would react to any embargo by shutting the Straits of Hormuz, oil prices look set for a period of volatility. One sticking point for Europe has been to replace Iranian crude that flows to Greece and makes up around one-third of Greek crude purchases. There are hopes that Saudi Arabia or Libya will be able to provide oil to Greece on the same basis as Iran.

Having fallen to $109.50 in overnight trading, the front Brent Crude contract rose back above $110 in early trading and we could easily see it ramp back above $112 should Iranian threats continue and the global economy continue to show solid growth. Falls in oil prices on Greek concerns look overdone as the main contribution to global GDP this year will come from emerging and developing markets, who remain on track to grow by 6% yoy on average.

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