Friday’s surprisingly good US employment report saw European equity markets continue their recent gains and head towards their highest levels since the middle of last year, however concerns about Europe continue to remain, simmering away in the background and this continues to keep investors cautious. While US economic data continues to show signs of improvement, European data, by and large, continues to deteriorate.

Greece’s finances remain the main focus of market concern and the weekend didn’t appear to bring the much promised for resolution any closer, with still no real signs of an imminent agreement on the new €130 billion bailout that the country needs to avoid a default in March. There had been talk of some form of tentative agreement between Greek PM Papademos and other party leaders on how to boost economic competitiveness, however this hasn’t been confirmed with the meeting due to reconvene later today.
 
The troika continues to press the Greek government for more reforms, as well as further wage cuts which the main opposition leaders remain opposed to. Due to the fiscal deterioration in the Greek economy since the bailout was agreed last year there is now a gap of between €15 billion and €20 billion, which the troika are insisting has to be met with further budget cuts. With the ECB remaining opposed to any form of changes with respect to the value of its holdings the impasse appears intractable.
 
As if to highlight the difficulties faced by the politicians the two biggest unions in Greece announced plans for a 24-hour strike on Tuesday, in protest at any further cuts, to pensions and the wages.
 
It now appears that the bank private sector involvement agreement has become a mere sideshow to the events now being played out between Greek politicians and the troika, as they battle to agree a new bailout, without which Greece will default on its debts.
 
EU leaders continued to ratchet up the pressure with Eurogroup chairman Jean Claude Juncker openly talking about the possibility of Greek default, something that would have been unheard of six months ago. In the event of default by Greece, attention could well shift towards Portugal whose bond yields remain at elevated levels.
 
The only economic data of note out today is German factory orders for December, which are expected to rise 1 per cent, a marked improvement of the 4.8 per cent decline in November. Any improvement in these German numbers would merely highlight the divergence between German economic data and the rest of Europe’s, which continues to remain weak.

By Michael Hewson, senior market analyst at CMC Markets