Sunday, February 26, 2012

Google search indicates a shift in public sentiment on sources of risk

It is remarkable just how quickly public sentiment can turn, particularly in the US. These shifts in focus often drive financial markets, with sources of fear changing rapidly. As discussed before, the Google search statistics are an excellent way to track this inflection in sentiment. The chart below shows Google News searches for the words "Greece" and "gas prices" in the US. The public and to a large extent the markets have dismissed the Greece related risks, focusing instead on Iran, oil, and gasoline prices. These results are corroborated by this informal survey. Oil and gasoline prices have risen not only due to the Iran situation, but also due to expectations of increased demand driven by a perception of stabilization in the Eurozone (which may not be warranted at this stage).

Relative search frequency on Google News for the words "Greece" and "gas prices" in the US

Risks in the Eurozone continue to persist, with Greece not yet a done deal. The Germans are so fed up with the situation, there is a possibility of a political backlash. Never underestimate the Eurozone leadership's ability to bring risk back to the table.
Reuters: Germany appears to be playing for time. It faces a critical vote on Monday to win support in the German parliament for Greece's second rescue package. Many Bundestag members are skeptical that Greece can meet tough fiscal conditions required to bring its public debt down to 120 percent of GDP by 2020.

Similar votes are scheduled in the Netherlands and Finland next week. Germany also wants to see whether enough investors sign up for Greece's debt swap, which Athens wants to complete by March 12, a euro zone official said.

"Most euro zone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag," one euro zone official said.
The less the public and the markets are focused on these Eurozone issues (not fully pricing in the risks), the more risky the situation becomes. As the perception of risk shifts away from the Eurozone (as the chart above shows), the potential for a surprise increases. Financial markets do not respond well to negative surprises.
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