LONDON May 18 The now familiar European cycle
of crisis followed by political action, temporary respite, then
another crisis enters that crucial second stage next week when
leaders of the 27-member European Union seek solutions in
Investors will also be concerned with how hard the crisis is
hitting the euro economy, with flash estimates of business
activity due from the latest purchasing managers' surveys, and
with the view from Bank of Japan policymakers meeting in Tokyo.
The potential for a Greek euro exit and the deteriorating
health of the Spanish banking system have fueled a growing sense
among investors that the crisis in the 17-member currency bloc
is nearing new heights.
"This whole European situation has been managed via crisis,"
said Didier Saint-Georges, a member of the investment committee
of Carmignac Gestion, which has about 50 billion euros ($64
billion) under management.
"You only make progress each time after getting pretty close
to the cliff."
"The key thing is whether a crisis will be big enough that
it derails the global picture. That is the question and the one
that matters the most," he said.
Fears that the euro zone disruption will upset global growth
were behind a worldwide shift out of riskier assets in the past
week that drove global stocks, as measured by the MSCI index,
to their lows for the year and the dollar to
The selloff spread to areas of the world where growth
prospects still inspire hope, with emerging market equities
at their lowest since December 2011 as they post their
longest loss-making stretch since 2008.
Like many global asset allocators, Carmignac Gestion has
adopted a defensive investment strategy in the current
environment, hedging euro risks with the dollar and Japanese
yen, and selecting stocks that are not exposed to the current
macroeconomic risks to drive performance.
"We do anticipate when we have these short term crises that
they will have an impact on the market, but if they don't have
an impact on the real economy then over time we can still do
pretty well in China or the U.S.," Saint-Georges said.
Muddling through is potentially the most likely outcome from
the informal EU leaders' dinner, but markets will be looking for
some reassurance that a credible policy response is going to
emerge at the formal EU Council summit in late June.
"The leaders will speak about growth measures, but major
concrete measures are unlikely at this stage," said Thomas
Costerg an economist at Standard Charted Bank.
Europe's leaders are still at odds over the role of the new
permanent euro zone bail-out fund, the European Stability
Mechanism (ESM), while France's new president, Francois
Hollande, is leading a dispute with Germany over the bloc's
'fiscal compact' to enforce government budget discipline.
While the politicians discuss a response to the crisis,
investors have sought comfort in the idea that the European
Central Bank will act to prevent any major financial accident.
But after it pumped over a trillion euros ($1.27 trillion)
into the region's banks so far this year, the threshold for
further action from the central bank could be quite high.
"The more they look at what they've done thus far, the more
they're finding they've just shoveled money into a never ending
hole," Jeff Sica, president and chief investment officer of SICA
Wealth Management, an independent wealth manager said.
"The ECB has to look at the French election (outcome) and
what's going on and say 'nobody is willing to do anything except
stand there and wait for us to give them more money'," he said.
The Bank of Japan may shed some light on how policymakers
are gauging the repercussions of the euro zone crisis.
The central bank is not expected to make any change in its
current asset purchase plan after the programme was extended at
the last meeting but it could hint at a future response if it
judges the global outlook is worsening.
Japan's Nikkei index shed 3 percent on Friday to log
a seventh straight week of losses, its longest such run since
the third quarter of 2001.
Flash estimates of the latest Purchasing Manager's indexes
(PMIs) for Germany, France and the euro zone on May 24 are
expected to show troubled economies in the euro south still
shrinking sharply but that Germany, the region's dominant
economy, remains on track for growth.
The influential German Ifo survey of business sentiment for
May, also due on May 24, will provide further clarity on whether
Germany is at risk of losing momentum because of the crisis.
Economists polled by Reuters in the past week said they
expect the euro area's total GDP to contract modestly in the
second quarter after it stagnated in the first three months of
With signs of weakness in the north of the region and
recession in the debt-weary peripheral economies, investors see
a critical need for near-term policy action.