Holland, one of the Eurozone’s core members, was dragged into centre stage of the crisis over the weekend as it failed to agree on budget cuts after the Freedom Party stated it preferred the deficit to remain above the 3% “Brussels limit” in order to prevent damage to economic growth. The move plunged the nation’s political situation into disarray that will likely require a fresh round of elections later in the year. It threatens the safe-haven status of the country, its triple A credit rating, and raises questions over the Eurozone’s Fiscal pact given one of the main proponents of austerity is struggling to pass deficit cutting measures themselves. It also casts doubts ahead of the Greek elections in May. Dutch 5 year credit default swaps (protection/insurance on Dutch sovereign debt) jumped to a record high, with the spread between Dutch and German 10 year bonds (the risk premium for investing in Holland) reaching a three year high.
In France, the Socialist Presidential candidate Francois Hollande polled well in the first round of the French elections, narrowly beating incumbent Nicolas Sarkozy. The market fears the repercussions of the French left gaining control of France and a position at the centre of the Eurozone, with Hollande already having called for a re-negotiation of the EU’s Fiscal Pact, instead wanting to relax the country’s deficit cutting plan.
If the political risk wasn’t enough to occupy investor attention, Europe suffered a blow on the economic front as a host of services and manufacturing PMI data came in well below expectations and pointed towards a slowdown in growth. Germany in particular was disappointing with the manufacturing PMI falling to 46.3 this month from 48.4 in March, against expectations of a marginal rise. Compounding troubles were reports from the Bank of Spain that showed the Spanish economy had technically slipped into recession with growth falling 0.4% in the first quarter of 2012, following the 0.3% fall experienced in the last three months of 2011.
It was unsurprising that the news initiated the latter half of what has become known as the risk-on/risk-off trade, with investors selling out of risky assets in favour of safer havens. Ten year government bond of the UK, US and Germany all gained in price (yields falling), whilst those of Greece, Italy and Spain all fell in value. Equity indices around Europe were sold off heavily, with the German DAX and Italian FTSE MIB lower by more than 3%, with the French CAC not far behind. The UK’s FTSE 100 finished 1.8% lower at 5666 on what was a troublesome day in financial markets.