A sizeable question-mark reappeared over Greece’s future within the eurozone during January. The victory of anti-austerity party Syriza in the general election triggered concerns the new regime will defy Greece’s creditors and force the restructuring of the country’s debt repayment. Germany urged Greece’s new government to ensure that it “meets the terms of the agreements it has entered into (and) honours its commitments”.
Over January as a whole, the Athens Composite plunged 12.6% and the benchmark index also suffered considerable daily volatility, falling 9.2% in a single day. At the same time, the euro plummeted against the US dollar, reaching its lowest level since 2003 The eurozone slipped deeper into deflation during January – the region’s annualised rate of inflation declined from -0.2% in December to -0.6% in January, dragged lower by an 8.9% drop in energy costs caused by the oil price’s slide. However, there was a tentative sign of improvement in the labour market – the eurozone’s rate of unemployment edged down from 11.5% in November to 11.4% in December, although considerable divergence remained at an individual country level.
In a bid to shore up the eurozone’s deteriorating economy and achieve “a sustained adjustment in the path of inflation”, the European Central Bank unveiled a programme of asset purchases totalling €60bn (£45bn) every month from March 2015 until at least September 2016. This equals stimulus of more than €1.1 trillion, and the news was generally well received by equity investors . Investor confidence in Germany continued to improve, rising for a third consecutive month during January and recording its strongest level since February 2014. Sentiment was underpinned by the effects of lower energy costs and euro weakness. Germany’s Dax index rose 9.1% during January, while the CAC 40 index in France increased 7.8%.
Elsewhere on the continent, the Swiss National Bank (SNB) unexpectedly scrapped the Swiss franc’s exchange rate cap with the euro and cut interest rates from -0.25% to -0.75%. The value of the Swiss franc soared and the benchmark Swiss Market Index fell almost 15% over two days, but recovered slightly to end the month 6.7% lower. The move triggered concerns over the outlook for Swiss exporters, as a stronger currency will make their products less competitive. Following the SNB’s move, Denmark cut its deposit rate from -0.05% to -0.2% in a bid to reduce the appeal of the krone.