Harbour commentary: Europe: A Step Back from the Brink

Key points

• Europe took a step back from the brink, with a market-friendly Greek election result, a rescue package for the Spanish banking sector, and an EU Summit that exceeded market expectations.
• Closer to home, stronger than expected NZ Q1 GDP was a welcome surprise, supporting our view that the NZ economy has reasonable momentum.

• However, global fixed interest markets remain rightly fixated on the economic and political challenges in Europe, and in this environment, local measures of consumers and business confidence have become more cautious.
• While a near-term European disaster has been averted for now, it remains an environment where the RBNZ is in no hurry to raise interest rates.

At the end of May, Europe felt like it was on the brink of collapse yet again.   Equity markets and commodity prices were falling sharply.  Global bond yields in core countries were at record lows, with the German 10 year bond yield touching 1.25%.   The market was pricing in a 50 basis point interest rate cut from the RBNZ in response to an anticipated disaster in Europe.  And credit and funding markets looked very vulnerable to freezing up as they had done in late 2011.