Greek CDS auction kicks the week in, and as FT’s article points out, the actual amount to be settled remains a question mark. The most important driver in the coming months is the growing rift between Merkel and Sarkozy – to win the elections, Sarkozy tries to adopt themes from both the far left and far right. It is obvious that France is unwilling, perhaps even unable to commit to a pro-European, pro-growth and pro-fiscally balanced policies. To effectively handle the coming fiscal target misses from Spain and the restructuring of Portugal’s debt requires a lot of unity and determination from the “Merkozy” – not to mention coercing the other surplus countries like Finland and Netherlands to play ball. If Paris and Berlin cannot agree on a game plan, the markets will call a time out and the European dream will lie in tatters (more in Euro Crisis: General links)
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| Stocks and "Inflaycon" |
Another interesting development is the turn in US bond yields. Yields have broken up from their 6-month trading range and this is currently viewed as a "return to normal" after euro crisis-induced safe-haven buying. Other explanations include the stronger US economy that surely leads to a tighter monetary policy during the coming decades (10-30 years is a long time). Maybe the FED signaling no more QE for now is one driver. There is currently little reason to buy US bonds – and if the global benchmark bond yield is higher, it will surely feed over to Japan and Europe. This will be really bad news later, but for now, the yield uptick is still marginal, and most expect the FED save the day with QE3 if the situation deteriorates further. This is the only reason why markets are not considering this as a risk-off driver (more in Views: Bonds links). |
| IMF is all-in on Europe |
The euro crisis schedule view remains unchanged. The Greek elections, more bad news and a need for a bailout 3 perhaps as early as next summer. Portugal will restructure soon and require a bailout 2 and the plan for Spain remains a huge question mark. I find it very hard to understand how the Paris-Berlin axis could come to an agreement or be able to afford to solve this. IMF is already broke, China is not stupid and US has elections and its own set of problems. More LTRO or the final capitulation of ECB and becoming a LOLR are the only practical options (Citi’s Buiter pdf1, pdf2).
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| Brent hit $80 before collapsing |
My own market views? For the next couple of weeks EURUSD range-bound with bearish tone, bond yields drift higher globally, stocks still somewhat bullish but the upside is limited and a risk-off mood change is coming soon. Oil is about to drop a lot – remember what happened in Gulf War 1?
Check my earlier Best of The Week- and Weekly Support-posts for more. I will post another Weekender-post (Economics and Off-Topics) in couple of minutes. I’m on Twitter, Facebook, email, paper.li. Ask me anything – I’m eager to please.
Quote of the Day: Never tell a client what they own – Walter Schloss, contrarian value investor, returning 16% p.a. Source: The Economist
EURO CRISIS: GENERAL
The “France-Germany-Greece-Portugal” Disconnect in 2012Q3 – Place du Luxembourg
a dysfunctional Franco-German relationship in the early days of the Hollande presidency is likely to lead to European political deadlock. This is likely to coincide with Greek elections and a second bailout request from Portugal. Clearly, any ensuing political crisis or financial turbulence will be transitory, as either the ECB or the EFSF will, most likely, intervene.
Nicolas Sarkozy closes the gap
Very nice short review of the coming issues
When will the euro split asunder? When Germans feel it in their pockets – The Telegraph
Now back to the real world. It's most unlikely the euro will survive in its present form to see this moment of doom, but you get the picture. The whole thing is essentially a house of cards
Spanish Banks Account for 47% of ECB Credit in February; Spain's Real Debt to GDP Ratio is 110% Not Reported 68%; Spain Will Implode. It's a Wonder it Hasn't Already – Mish’s
Meanwhile Spanish banks continue to plow into leveraged debt on their own bonds, with Spanish unemployment over 23%, with youth unemployment of 49%, with widening regional debt problems, with massive unrecognized housing sector losses, and with more austerity measures coming that will exacerbate all of the previously mentioned problems!
Spain — a large version of Ireland — has had a similar property slump and its banks are now bust and all the free money in the world from the ECB isn’t going to make it any better soon.
'The Financial Transaction Tax is Overdue' – Spiegel
European finance ministers have failed to reach an agreement on a proposed financial transaction tax. Now there is talk of watering down the measure to get something on the books. German commentators on Wednesday say that while it may be deferred for now, such a tax is inevitable.
Charlemagne: Elected, but how democratic? – The Economist
The EU needs more democracy—and yet the European Parliament is flawed
we have no idea how voters in the eurozone – and Germany in particular – will respond to proposals for a fully-fledged political and fiscal union, and therefore what the future of the euro will look like.
EURO CRISIS: GREECE
[Greece CDS] Net notional outstanding is NOT $3.2bn – alphaville / FT
Markit iTraxx SovX Western Europe is a tradable index of 15 European countries. After Greek credit event, the contract was split – to a new index 14 European countries plus a batch of Greek CDS contracts, 13.4bn in total – but how much in net?
Markit iTraxx SovX Western Europe is a tradable index of 15 European countries. After Greek credit event, the contract was split – to a new index 14 European countries plus a batch of Greek CDS contracts, 13.4bn in total – but how much in net?
On the optionality in restructurings: The moral of the story though — the whole awful Greece CDS story might not be over on Monday.
IMF is very much exposed to Eurozone – and not able to raise much more money.
former IMF senior: With Greece in deep recession for the fifth year running, several prominent observers have been calling on it to exit the Eurozone. This column argues this would not help Greece’s economy recover faster from its deep recession. Greece will still be the most heavily regulated country in the OECD and returning to a drachma would only add to the debt burden.
Despite Progress, Euro Crisis Is Far From Over – Spiegel
The Greek debt cut worked and the rescue package has gone through. So is the euro crisis over? By no means. The situation in Greece will take a turn for the worse again in a few weeks. The other euro nations will have to use the time until then to get their own houses in order -- especially Germany.
The wait is over – The Economist
The biggest sovereign default in history, and the most anticipated
VIEWS
STOCKS: What to do if bond yields rise? – alphaville / FT
HSBC notes that rising yields, if at low levels, are good for stocks. After the yield through, consumer staples has historically been the underperformer.
STOCKS: The New Abnormal: An Update – The Capital Spectator
Inflation expectations and stock prices rising together
STOCKS: Shares and shibboleths – The Economist
How much should people get paid for investing in the stockmarket?
EM: Emerging Markets Briefer – Danske Bank (pdf)
The end of fear – the gradual return of normality (31 pages)
FX: Forecast Update: March – Danske Bank (pdf)
Presentation slides (26 pages)
BONDS: Yield Forecast Update - Curve steepening has begun – Danske Bank (pdf)
BONDS: Is the bond market tightening for the Fed? – Humble Student of The Markets
If the markets are tightening when the Fed doesn't want to tighten, how will it respond? In the past, the Federal Reserve has used interviews and leaks after significant announcements to "clarify" its statements. Watch for further statements in the days to come to see the Fed's reaction to the backup in bond yields.
BONDS: 10-year Treasuries in trouble; How real is real? – Saxo Bank
The early 'riding the wave' of easy money is over. The Federal Reserve will still try to engineer further easing, but the truth is harder to ignore and some time soon even the dogmatic Federal Open Market Committee will need to consider an attempt at an exit strategy.
From Goldman Sachs
ENERGY: Shock ‘n’ oil – voxeu.org
Chief Economist of GE: Oil prices are again on the rise – will this derail the economic recovery? And what if there is an oil shock on the horizon? This column presents an overview of the oil market and its possible effects on the global economy. It argues that if there is a shock, the list of casualties will have Europe at the top with the US close behind.
ENERGY: The oil price is the new eurozone crisis – The Telegraph
No sooner has the pressure on markets from the eurozone crisis begun to ease than investors have found something else to worry about – the oil price.