After another week of volatility this one sets to be more of the same
with plenty of unanswered questions and investors still desperately
looking for direction from politicians and central bankers alike.
The biggest drawcard is the meeting of global central bankers at Jackson
Hole later in the week but the question is: will markets get
the answers they need to pull things out of just that - a hole, which
just seems to be getting deeper.
The cartoon below pretty well sums up the situation for the Euro right now. Germany's Merkel and France's Sarkozy, though united in the cause, are pretty much fighting what looks like a loosing battle to protect the Euro. Germany in particular continues to play hard-ball on Eurobonds as it seeks debt-breaks constitutionalised in the European Union.
The cartoon below pretty well sums up the situation for the Euro right now. Germany's Merkel and France's Sarkozy, though united in the cause, are pretty much fighting what looks like a loosing battle to protect the Euro. Germany in particular continues to play hard-ball on Eurobonds as it seeks debt-breaks constitutionalised in the European Union.
Source: FT.com
European peripheral stew getting hotter
Other developments concerning the European periphery are stewing in the background and there's no need for chilli - things are hot enough to burn investors' mouths already! Here's a taste:
European peripheral stew getting hotter
Other developments concerning the European periphery are stewing in the background and there's no need for chilli - things are hot enough to burn investors' mouths already! Here's a taste:
- A little over a week ago Greece released data showing its economy contracted by 6.9 percent in the second quarter and consensus expectations are for minus 5 percent growth for the whole year. This doesn't bode well ahead of the all important visit this week by the "Troika" (the International Monetary Fund, the European Central Bank and the European Commission) which will assess Greece's progress to determine if it can receive its next tranche of bailout loans. Meanwhile Finland has denied further payment to Greece before it gets collateral. This outright refusal could stall the second payment and is now broadly referred to as the Finland-clause, which both Austria and Holland are likely to join. This represents a major “break-down” in EU commitment and the Finnish clause combined with the existing German one tells us it is only a matter of time before the funding for banks dries up.
- Italian banks borrowed EUR 80 bln last week from the ECB. This is the first time they have had to go to Frankfurt to fund themselves. The overall European bank funding dependence is between 3/2 to 1 in deposits to assets.
- Spanish and French banks Credit Default Swaps (CDS) are now wider than during the 2008 financial crisis.
Source: Bloomber LLP & Saxo Bank
The increased tension in interbank rates can be seen by increased deposits under the European Central Bank's “deposit facility” where 90 bln. EUR was parked last Thursday. (This make no sense unless you don't want to lend out to other banks!)
The increased tension in interbank rates can be seen by increased deposits under the European Central Bank's “deposit facility” where 90 bln. EUR was parked last Thursday. (This make no sense unless you don't want to lend out to other banks!)
Japanisation increases QE likelihood
Talk over the weekend was about "Japanisation" as US yields (10 year) broke 2 percent. (Japanese yields have never for any sustained period risen above the 2 percent level they broke in 1996! Furthermore Japan has seen decades of deflation, no-growth, no-productivity and a move from equity to bond risk in investors' portfolios. The Nikkei 225 is still 75 per cent below its peak from 1989.)
Oversold ahead of Jackson Hole
The market is extremely oversold going into the Bernanke-week or Jackson Hole week with 42 bln. US dollars having been pulled from equity funds so far this month, which is the most since February 2009 (the low in the S&P was in March 2009 at 666). Since May and the announcement of exiting from Quantitative Easing (QE) 110 bln. USD has been withdrawn from equities.
Japan's lost decades and forcing FOMC's hand
Going into Jackson Hole one needs to take into account the way Federal Reserve Chairman Ben Bernanke thinks. Do not forget that when he talks about Japan’s lost decades he thinks it was due to inactivity, too little too late in terms of printing/asset buying. With growth forecasts now at 1 per cent or below for the second half of 2011 it is absolutely clear to me that he will force the hands of the Federal Open Market Committee (FOMC). He may not get full support, but he firmly believes in QE and OT (Operation Twist). His reputation is on the line, and changing course would be detrimental to his “academic image” – hence the odds are increased for QE3 – and not OT in my opinion.
Talk over the weekend was about "Japanisation" as US yields (10 year) broke 2 percent. (Japanese yields have never for any sustained period risen above the 2 percent level they broke in 1996! Furthermore Japan has seen decades of deflation, no-growth, no-productivity and a move from equity to bond risk in investors' portfolios. The Nikkei 225 is still 75 per cent below its peak from 1989.)
Oversold ahead of Jackson Hole
The market is extremely oversold going into the Bernanke-week or Jackson Hole week with 42 bln. US dollars having been pulled from equity funds so far this month, which is the most since February 2009 (the low in the S&P was in March 2009 at 666). Since May and the announcement of exiting from Quantitative Easing (QE) 110 bln. USD has been withdrawn from equities.
Japan's lost decades and forcing FOMC's hand
Going into Jackson Hole one needs to take into account the way Federal Reserve Chairman Ben Bernanke thinks. Do not forget that when he talks about Japan’s lost decades he thinks it was due to inactivity, too little too late in terms of printing/asset buying. With growth forecasts now at 1 per cent or below for the second half of 2011 it is absolutely clear to me that he will force the hands of the Federal Open Market Committee (FOMC). He may not get full support, but he firmly believes in QE and OT (Operation Twist). His reputation is on the line, and changing course would be detrimental to his “academic image” – hence the odds are increased for QE3 – and not OT in my opinion.
Maintaining the illusion
We are constantly bewildered about how bureaucrats and politicians are prepared to do anything, and I mean anything to keep the illusion going. The lower the S&P goes this week the more likely it is we will see a fully fledged QE3 – and OT. Maybe even both!
It’s worth noting one key change since last week: The dividend yield on
the S&P500 is now higher than 10-year US bonds. This is by no means
a call to go long stocks yet, but clearly holding one basket of
S&P500 stocks rather than a 10-year US bond for the next 10 years
seems a more interesting tactic. (Having said that the analogy to Japan
is tempting as the 10-year bond currently yields 0.99 per cent.)We are constantly bewildered about how bureaucrats and politicians are prepared to do anything, and I mean anything to keep the illusion going. The lower the S&P goes this week the more likely it is we will see a fully fledged QE3 – and OT. Maybe even both!
US 10 year yield 2.08 Per cent (Source: Bloomberg LLP)
S&P500 Dividend yield (Source: Bloomberg LLP)
Strategy
We are entering extreme oversold conditions where EU politicians have reached a new low in terms of verbal nonsense and there is growing tension in funding markets. This calls for desperate measures and actions and this week could set the direction for the reaminder of the year. We called Q3 Maximum Uncertainty in our Q3 outlook – for now my Q4 title is set to be: Maximum Intervention (subtitle: end of the managed economy - dirigisme.)
Keep the powder dry: the Swiss Franc, US and German yields are out of sync with reality. Fear is the norm, and averaging into equity exposure could be the name of the game from here.
We are entering extreme oversold conditions where EU politicians have reached a new low in terms of verbal nonsense and there is growing tension in funding markets. This calls for desperate measures and actions and this week could set the direction for the reaminder of the year. We called Q3 Maximum Uncertainty in our Q3 outlook – for now my Q4 title is set to be: Maximum Intervention (subtitle: end of the managed economy - dirigisme.)
Keep the powder dry: the Swiss Franc, US and German yields are out of sync with reality. Fear is the norm, and averaging into equity exposure could be the name of the game from here.
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