Macroeconomic situation

Massive turbulence on the financial markets

Share prices on the global equity markets tumbled in the summer as a result of the escalation of the euro crisis. Concerns reached a stage where banks and economists were discussing exit scenarios for some EU countries, and indeed the breakdown of the entire monetary union. In the 2nd half of the year, the equity indices worked like a political sentiment barometer, reflecting the desperate efforts of political leaders in the euro zone to resolve the debt crisis. The markets only relaxed towards the end of the year, but the main European indices failed to recover their earlier losses and thus closed 2011 down on the year.

The US equity markets also came under pressure because of the euro crisis and the first-ever downgrade of the USA by the rating agency Standard & Poor’s around the middle of the year. However, the US economy reported robust macro-data in the 2nd half of the year, and the DOW JONES INDUSTRIAL index posted a clear gain of 8.4 per cent on the year.

Flight to safe havens on the bond markets

The European Central Bank (ECB) put an end to its interest rate hike cycle in autumn and cut its key lending rate in two steps from 1.5 per cent to 1 per cent. In view of the increased likelihood of a recession, the ECB regarded inflation forecasts as well-established on the market. Inflation fell to 2.7 per cent towards the end of the year in the euro zone. The commodity markets, which fuelled global inflation at the beginning of 2011, also eased off. The US Fed has kept the Fed funds rate practically at zero since 2008 and has communicated its intention of sticking to this strategy until 2014.

The non-standard monetary measures taken by the ECB were a big issue in 2011. By purchasing government bonds (around € 220 billion to date), the central bank supported certain peripheral countries and provided the banking sector with massive levels of liquidity. In December, the markets welcomed the ECB’s decision to offer the banks liquidity for three years via long-term refinancing operations (LTROs); so far, the banking sector has drawn down more than € 1,000 billion.

On the bond markets, investors fled to safe havens, with the US Treasuries benefiting from this development. The euro depreciated significantly against the US dollar in the 2nd half of the year and closed 2011 at 1.30. Germany was the big winner in Europe with historically low interest rates, with yields for 10Y German government bonds dipping below 2 per cent in September. Due to the high level of risk aversion, bonds of European core countries were occasionally even traded at a negative yield. Some countries were cut off from the capital markets and could only refinance through the European emergency facility (Greece, Portugal, and Ireland), while the yields of Italy and Spain, too, temporarily reached levels that were considered detrimental to ratings in the long term.