View: EUR bounce has frail foundations, sell rallies leaning on EUR/USD1.2727
EUR price action has looked more constructive in recent weeks, having bounced to the 1.2407 resistance line at the start of the month finally punching through this on Tuesday amid on-going hopes that European officials were ready to be more interventionist in tackling the debt crisis. This speculation had culminated in a Der Spiegel article suggesting the ECB was looking at a plan to cap periphery yields at specified levels which has proven so exciting to participants that even ECB and Buba downplaying has been shrugged off. Indeed, the market is so optimistic that German 2-year yields brushed back into positive territory this morning as EUR/USD itself trades in the 1.2450/60’s, shrugging off a weaker equity market performance on the back of more worrying data out of Asia, specifically the Japanese trade numbers which showed an alarming 8.1% y/y drop in exports with sales to China falling at 11.9% and to the EU down an alarming 25.1% from a year earlier.
Full report below…
View: Banking/Fiscal union something for a smaller Eurozone, we dislike French debt
Global markets response to the Spanish bank bailout is interesting, it appears that investors have become a little more confident they can compartmentalise the situation while at the same time seeing the package as insufficient, which is most clearly visible in the diverging paths of equity markets and Spanish bonds. The poor performance of this market is clearly understandable given the structure of the package will be detrimental to existing SPGB holders, effectively creating a €100bn tier of debt that sits above them on the creditors list (assuming it is channelled through the ESM), something we know from Greece is never good. Furthermore the actual sums involved look unlikely to be sufficient, even the Spanish government acknowledges that there are still significant downside risks in the property market. New guestimates from JP Morgan have suggested the sector might need €350bn in total, ouch. It doesn’t look particularly good for some of the other creditors, Italy for example will have to fund its contribution in the markets at 6% while lending to Spain at 3%.
Full report below…
View: Key EUR/USD1.1700/1.2000 long-term pivot zone now the draw
EUR/USD’s decline continues at a rather precipitous pace, the rally in the early part of the week snuffed out as soon as first resistance was hit at 1.2825, and following the weak German Ifo number on Thursday morning the pair slid to new multi-month lows sub 1.2520 before bouncing. And to make matters worse the flash PMI’s continue to point to an imploding regional economy, the Eurozone composite miss at 45.9 vs. 46.6 consensus the weakest read since June 2009, oh dear. It would be even worse were it not for a still resilient German services PMI number (52.2 from 52.0). At least this data moved with trend, the reversal in Ifo is more serious in that it shows that the resilient survey data which some have been clinging to is finally beginning to catch up with weak German real economy data, something we’ve discussed previously.
Full report below…
View: Close Short Bono, short EUR/USD, tighten DAX stop. EUR/JPY longs appealing
The market moves of the past week have been interesting, particularly the performance of Eurozone assets which once again have proven rather resilient to local pressures even as global markets sold off on the back of these very drivers. We have a few positions looking for a worsening of things here but they are not really performing as expected, in fact Spanish 10-year bond yields are now off 17bps from the recent intra-day highs and spreads to bunds have tightened back to (a still stressed) 475bps. While mid-term the path is to higher yields, at this point taking profits on shorts might be prudent and we close our short recommendation from May 3rd accordingly at 6.19% (+37bps).
Full report below…
View: A Greek exit would be the perfect test case for the remaining PIIGS
The double whammy of the election of a French socialist President and anti-austerity parties sweeping out the incumbent coalition in the Greek parliamentary polls are both clear negatives, occurring at a time when the region’s real economy in already heading back to recession. While the implications of the French election are by no means insignificant, they are something that will take shape over a slightly longer timeframe. Furthermore there are still legislative elections to come on June 10/17 which means the division between campaign words and governing actions will remain somewhat elevated. So we’ll leave that at that for now and move to the faster moving situation back in the birthplace of the crisis, Greece, which has more direct market implications.
Full report below…
View: Tighten stops on DAX longs, start looking for a trigger to sell EUR/USD
Approving the Greek bailout failed to create that watershed moment that we had earlier hoped for, political bickering seeing to that. In the end, the whole process proved another example of how deep the divisions in the Eurozone are, to the point that opposing sides are happy to elevate what are effectively irrelevant points to the level of deal breaker. Indeed, it seems ridiculous to place so much weight on what Greece’s debt/GDP ratio might be in 2020 when the measures forced upon the country to get there will simply reinforce the downward spiral the economy is already in, ensuring the target is missed. The fact the Troika think 120% debt/GDP level is sustainable following what would amount to a decade of austerity is even further outside the box of rational thinking.
Full report below…
View: Germany’s selective historical memory needs jogging, not just for the Greeks
Despite our more constructive ideas about a Greek bailout, it seems the political tide is shifting with the default view gaining traction again in markets. As ever it appears to be driven by German machinations, refusing to lift that boot of the Greek neck despite the government pushing amended legislation through parliament on Sunday night and New Democracy leader Samaras appearing to have finally put pen to paper to honour the promise to continue with this path after elections. The wires are awash with rumour and counter rumour as to whether the Eurogroup will cut the Greek’s loose with the latest leak suggesting that officials were considering proposals to delay some of all of the bailout but still avoid default is the latest low. Sounds a neat trick.
Full reports below
View: Greek bailout creates upside, Greek chaos creates downside. Easy bet.
Greek problems continue to unsettle markets, evidenced again on Monday. Of course, investors are right to be nervous, simply because the consequences of failure are so great. It’s not just the debt restructuring talks either with the Greek government under pressure to implement further budget cuts in order to qualify for the next disbursement from the €130bn bailout fund. Failure of either discussion could trigger that much-feared default when that €14.5bn redemption hits on March 20th. The fact that officials from both sides keep setting close deadlines that in turn are missed and PM Papademos’ request the Finance Ministry produce a report on the implications of a default and Eurozone exit are not particularly helpful either.
Full article below….
- Revisiting The Greek “Razor’s Edge” (zerohedge.com)
View: EUR problems to linger, volatility good for RV bond plays, US to outperform
It is interesting how people still feel the need to believe that the start of each year is a clean sheet, particularly markets. More relevant should perhaps be the level of the New Year’s Day hangover – now compounding those lingering from the past few years’ excesses – in trying to assess how this year will play out. It is rather unfortunate that the main story is still the most obvious by a country mile, Europe. It is far more fun to drum up a list of potential surprises, or in the post Taleb world ‘Black Swans’, which will catch markets by surprise. It still may be true with an increasingly stressed Iran (fate of regional ally Syria being a key factor here), a possible soft patch or not in China and the more important year-end risk emanating from the end of the trusty Mayan Calendar which any stockpile of guns and tinned tuna can’t save one from. But the real stresses will emanate from the Eurozone which despite all of those repeated breakthroughs remains in turmoil.
While to us it seems clear what the problem is – insolvency – governments and the EU itself still seem to believe that it is more a matter of rebuilding confidence, particularly that of fiscal sustainability. Unfortunately the debate on how to manage this has been one dimensional and Germanic in nature thus far forcing futile austerity packages upon everyone from Greece right up the ratings scale to France. This medicine might be fine for the usual business cycle recession. But this is not one. Scant attention has been paid to growth measures, key to stabilising debt ratios, with the structural reforms that might help raise productivity often being the first steps jettisoned by governments. Instead so called temporary tax hikes and quickly formulated spending cuts underpin fiscal consolidation, dampening demand and auguring in recession or maybe depression.
One only has to look towards debt trap Greece to see how such policy initiatives exacerbate the initial problems. Of course it’s fairly easy to criticise this example given that tax evasion seems to be more firmly embedded in Greek hearts than the Olympics (the fact that hosting an Olympiad often leaves one impoverished can’t be coincidence!) but the prescribed mix of aggressive fiscal measures and (in)voluntary debt restructuring which will still leave Greece with debt levels of 120% of GDP if (unachievable) targets are met is laughable. As one Greek government spokesman noted this morning, if the current bailout fails they will have to leave the euro. Greek depositors are clear on the risks having been voting with their feet to months in what is a slow motion bank run – and one that could quicken at any moment. We’d bet Merkozy et al. will view this latest comment as another negotiating tactic. Their own stance will of course be that leaving will condemn any country to a future back in the stone-age. We’ll come back to this specific subject in another note.
A bust Greece is the most immediate problem although that is by far the sole concern. Portugal looks to be following closely in Athenain steps while recent austerity measures in Spain and Italy will inevitably draw those economies into recession with France and its AAA rating not far behind. One additional risk we think is worth flagging is Hungary. In fact it could be the pick of EU members to be the first forced into something disorderly. The government in Budapest is developing an authoritarian tinge having already nationalised private pensions and is currently staging a soft coup to disgorge the NBH of its independence. The US has been vocal in its criticism, a band of journalists have been on hunger strike since early December complaining of censorship and Ministers appear hostile to IMF/EU conditions. The old problem of FX debt may yet turn toxic too with the forint nudging record lows vs. the EUR. Given that liabilities are largely held by foreign banks this creates room for a nasty surprise, a risk for Austrian institutions in particular. PLN/HUF longs could be a way to play this; Poland has its problems but, as round one of the financial crisis proved, is more resilient than most with a nice mix of competitiveness and domestic demand. We’d also be more optimistic on the zloty should risk appetite improve whereas Hungary’s problems should prove more lasting.
We’d bet Germany turns out to be more resilient than some expect; thanks in part to our view of a weaker Euro allowing the country’s export machine to grab further market share from its uncompetitive peers even if global growth as a whole slows. This trend should be helped along by both a more accommodative ECB, which is likely to continue to deny money printing while continuing to do so and cutting rates further. We also remain optimistic on the dollar, rate differentials helping what should be relative outperformance in economic terms too – a view the December ISM figures support, not to mention the Chicago and Milwaukee PMI figures already released – and of course its status as the world’s reserve currency looks a little safer.
Looking at the euro chart we’ve seen not an unsubstantial decline since those October highs perhaps but looking at the blocks fundamentals a much larger adjustment is still needed to help temper the recession/depression risks stalking club-Med. Selling rallies should remain the play based around a core short using swings in positioning to take the most out of declines. For now this pair has held the Jan 2011 lows (1.2870ish) and looks to have some room to test back towards and possibly through 1.3200 in the short-term as shorts are squeezed on New Year enthusiasm and technical break of the downtrend form those October peaks. But medium-term accounts should hold on through this and look to add if the opportunity to sell in the mid 1.30’s comes up. Resistance remains the 200-DMA. We’d expect to see EUR/USD sub 1.1500 at some point this year and a move towards parity is by no means an unreasonable target if you also buy into a cyclical dollar upswing.
Eurozone trials and tribulations should also keep volatility elevated in the bond markets creating more opportunities for the relative value accounts, although given how liquidity can evaporate as stresses pile up one might need to be rather nimble. Bunds will remain the region’s ultimate safe haven even if we see setbacks form time to time as the failed auction on November 23rd proved. But the real risk looks set to remain in France and Spain (which could flare up again) with Belgium, Austria close behind. We’d look to use any narrowing of spreads between these credits and bunds to look at wideners, depending of course on the immediate news flow. From past experience these markets are still slow to grasp both political and macro developments. The ECB may provide another source of movement. Italy is likely to see similar swings although given where yields are currently trading perhaps have less attractive credentials from a trading perspective. Greece of course is history although might end the year as a distressed debt play.
Good luck for 2012.
- Five reasons the world won’t end in 2012 (csmonitor.com)
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