London: The pound, gilts and FTSE 100 Index may be the weak spot of European markets after Greece was offered a bailout over the weekend, strategists said.
“The Greek problem should calm down, and we should look at the next one on the agenda for markets to watch,” Alain Bokobza, Paris-based head of global asset allocation strategy at Societe General SA, said in a phone interview. “The next one to be watched for is the UK.”
European governments put forward a rescue package worth as much as €45 billion ($61 billion) for debt-plagued Greece at below-market interest rates in a bid to stem its fiscal crisis and restore confidence in the euro.
With a UK election scheduled for May 6, four opinion polls this week suggested no party will gain an overall majority in Parliament as the country struggles with sluggish economic growth and a record deficit.
The UK’s budget shortfall reached 11.8% of gross domestic product in the past fiscal year, near Greece’s deficit of 12.9% of gross domestic product last year. Greece’s gap is the highest in the euro’s history and more than four times the European Union’s 3% limit.
“We think that the UK could be the next concern for the market,” Pierre-Olivier Beffy and Amelie de Montchalin wrote in a Global Economics Research and Investment Strategy report for Exane BNP Paribas on Monday.
The Paris-based economist and analyst added that the British situation is worse than that of Portugal, Spain or Italy.
Concern that some European countries will struggle to curb their budget deficits weighed on stocks this year, with the Euro Stoxx 50 index dropping 11% to a five-month low on 5 February.
The Stoxx Europe 600 Index rallied for six straight weeks from 1 March, its longest winning streak in a year, amid optimism that Greece would receive an international bailout to avert a deeper crisis.
The pound slipped 0.4% to 88.20 pence per euro as of 1:12 p.m. in London, from 1.139 euro last week. The yield on the 10-year gilt rose 1 basis point to 4.05%, while the benchmark FTSE 100 fell less than 0.1 % to 5,769.91.
“We are extremely underweight UK equities,” said Herbert Perus, Vienna-based head of global equities at Raiffeisen Capital Management, whose team helps oversee about $36 billion. “Some ratings are too high and there is a possibility that in the forthcoming election there is no clear majority. This could lead to uncertainty.”
Greece’s task in boosting growth and cutting its budget deficit is still a formidable one, while the outlook for European stocks will worsen slowly but steadily, according to UniCredit SpA’s chief strategist.
Greece will need to implement tough actions to both reduce the fiscal deficit and restore competitiveness if it wants to bring its debt back on a sustainable path, Thorsten Weinelt, Munich-based global head of research and chief strategist at UniCredit, wrote in a report on Monday.
“European equities are prowling in the midst of a transition period, moving from a strong uptrend towards a multi- month sideways/correction phase,” Weinelt wrote. “Risk factors will gain an increasing influence over time, while the drivers of the upward trend are gradually losing traction.”