Cyprus stocks regained their upward momentum, with the Main & Parallel market index recording gains of 4,14%, according to Hellenic Bank Investments Ltd. The market was digesting preliminary full-year earnings, which as a whole could be viewed in a positive light. Average daily trading volume was a little lower than the prior week at CY £851 thousand. The market also continued to pay close attention to the interest that Athens-listed shares of Bank of Cyprus attracted.
Cyprus: Good news on fiscal front
A better-than-expected budget deficit announcement was quite welcome news during the week that was. According to preliminary estimates from general government accounts, the budget deficit for 2004 fell to 4,2% of GDP compared to 6,3% of GDP in 2003. The government managed to increase its income by 7,7% to CY £2.866,9 million, while the growth of total expenditure was contained to 2,7%, raising total expenditure to CY £3.173,2 million. The most important rise in incomes was recorded in the social contributions category, which rose by 27,7% to CY £613,9 million. Total public debt as a percentage of GDP reached 71,9% of GDP at the end of 2004 or CY £5.203,6 billion compared to 69,8% during the previous year.
The conclusions one can draw from this improvement in the deficit are that firstly, it is much more plausible to hope for a reduction in the budget deficit to below 3% of GDP during 2005 when the 2004 deficit is at 4,2% rather than 4,8% or 5,2% (as forecasted before the year-end). The second issue concerns whether there were special factors that helped the reduction of the deficit during 2004 but will be absent in the future (e.g. the tax amnesty with a one-time tax). Nevertheless, since the European Commission has already endorsed the government’s plan, one can afford to be optimistic on the fate of public finances going forward.
Cyprus: February inflation remains elevated
The announcement of the February inflation was a rather neutral event, as inflation remained at the relatively elevated level of 2,88% during the January to February of 2005 period. Inflation for February was 2,80% (year-on-year)- a little lower than January’s 2,94%. According to the Cyprus Statistical Service, the slight month-on-month rise was due to higher petrol prices and medical care costs, while telephone charges fell. Inflation will be an interesting story to watch this year, since it may determine whether the Central Bank will continue with its monetary easing or whether it will hold rates at 5,25%. Of course it is not inflation in the short-term, but in the medium-term that should determine monetary policy, but if inflation is running at way above a certain target (2% for example is the European Central Bank’s target), it becomes difficult for monetary authorities to justify rate cuts.
ECB: Rates on hold… probably for a while
The European Central Bank did not surprise when it left its key interest rate unchanged at 2,00% during the previous week. Recent signs from the Eurozone economy concerning economic growth have not been good. This made ECB President Jean-Claude Trichet call growth disappointing, although he sounded more upbeat about prospects going forward. The ECB staff however, cut its Eurozone growth projection to 1,2-2,0% for 2005, compared to 1,4-2,4% it was forecasting in December and also cut its 2005 inflation forecast to 1,6-2,2% compared to 1,5-2,5% previously. Trichet said the ECB was not witnessing any inflation pressures building up presently but it was closely watching developments and how they affected the medium-term inflation outlook. The ECB continued to have an upward bias on interest rates, but with growth weak and inflation apparently tame, the ECB will be hard pressed to justify any rate rise in the coming months.
Global: Oil higher… and stock markets higher too
One interesting phenomenon during the previous week was that oil continued to move higher, while shares posted impressive gains as well. Oil remained strong at above $53 a barrel on the New York Mercantile Exchange, as OPEC members increasingly came out to say that they saw no need for output quotas to rise. Oil briefly topped $54 as well, a level not seen since October of 2004 when oil peaked at $55,67. The OPEC President in particular said that prices kept climbing despite that the oil market was well supplied and as oil stocks continued to build.
Despite OPEC’s reassuring words, it is difficult to explain this recent surge in the oil price just as a reflection of unseasonably cold weather in the Northern hemisphere and speculative buying, as many participants seem to believe that the oil market’s fundamentals remain strong and present further upside. Evidence of this was also seen in equity markets, as oil-related issues led the markets higher. Investors previously appeared reluctant to push oil shares much higher as they were concerned about the long-term durability of the oil rally. Their reluctance was less apparent in the last few weeks and indicatively, Exxon Mobil has built a more than $20 billion lead over General Electric, replacing the latter as the world’s most valuable company (Exxon Mobil’s market capitalization reached $405 billion at Friday’s close).
While economic leaders, such as U.S. Treasury Secretary John Snow and other economists have spoken about the adverse economic effects of oil trading above $50 a barrel, stock markets around the world chalked new highs for the year- in some cases 4-year highs. Much of last week’s bullish sentiment stemmed from the better-than-expected U.S. employment survey, as the payroll numbers surpassed expectations, but not excessively, while average hourly earnings came in flat, allaying any concerns that wage inflation would lead overall inflation higher. The threat of higher inflation is seen as key in determining the pace with which the Federal Reserve will push interest rates higher. To sum up, the high oil price did not dent the market’s optimism, as investors for now seem to believe that the global economy can do fairly well even with an oil price over $50.
