Archive - 2012 - Blog entry

Surprisingly stable Risk. BTPs shot down in style. Italy? Down. Chinese data? Partially weak. Japan? In recession. French data? Weak. German data? Strong. Wow! Better have Friday’s PMI numbers really good. Analysts having to reinvent themselves once more as political experts to glare into a smoky crystal ball… Italian contagion contained, for now. Uh…Uh…!

"Uh...Uh - Bingo Bongo " (Bunds 1,30% unch; Spain 5,54% +9; Stoxx 2598 +0,0%; EUR 1,293 -20)

The Target2 imbalances caused much consternation earlier this year as some economists focused on them as either signs that a transfer union was a fact on the ground, or alternatively, as a sign of the pending costs to Germany, which German politicians fail to acknowledge. 

This Great Graphic comes from the Brussels Blog at the London School of Economics, who in turn got it from Place De Luxembourg

Much ink has been spilled trying to decipher the true meaning, but we know that the Target2 imbalances are nothing more or less than a reflection of the intra-euro area current account imbalances.  Before the crisis those imbalances were financed largely by the private sector.  That was part of the financial integration process whereby creditors would recycle their surpluses by primarily buying bond in the debt countries.

News of greater political uncertainty in Italy and poor European data is spurring risk-off moves, with the dollar and yen firmer, emerging market currencies mostly softer, global equity markets lower and core bonds a bit firmer.  

Following much weaker than expected German industrial production figures last week has been followed in kind by disappointing French and Italian output figures today.  Italy reported a 1.1% decline.  The consensus was for a 0.2% decline and the Sept series was revised lower.   French output fell 0.7%.  The consensus was for a 0.3% increase.  Yet it is really the Italian political scene that is the key driver today with the benchmark 10-year yield up more than 30 bp, dragging up peripheral yields generally.  Italian shares have been particularly hard hit and a couple of banks were limit down and stopped trading.  

This week is the last before the holiday mood sets in.  We identify ten considerations that will drive the capital markets. 

News that the Greek bond buy scheme did not get sufficient takers to reach the 30 bln euro target set the commentariat ablaze.  This may prove to be a minor technicality as Greek banks initially offered 75% of the Greek bonds but were prepared to pitch them all if necessary to ensure EU aid is forthcoming, which is the source of their recapitalization funds.

The bigger story is the fall of the Monti technocrat government in Italy.  Berlusconi's PDL party pulled support by abstaining economic reform votes at the end of last week.   After a series of consultations with the Italian president, it appears that parliament will not be dissolved until two important pieces of legislation are approved, the 2013 budget and financial stability measures.  The former is needed for obvious domestic reasons.  The latter is needed to maintain credibility in  EMU; assuring its partners.