Four months before the election. And yet, a horrendous migration across the Pacific
We will get a test once again as to the effectiveness of the central bank/MoT confidence game.
With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect
Just a phase....
No one likes paying taxes. You’d think.
We have discussed the probability (around 50%) and possibility of a Greek exit from the Euro ad nauseum; how the post-election anti-austerity rage is bringing the world to a new realization that this is probable not possible and the widespread risk aversion of this event is much more of a global event than local - no matter how many times you are told how small Greece is. Critically, as BofAML notes, it is the systemic threat of an untamed banking and sovereign crisis in Europe which makes multiple-sigma events less 'tail' and more 'normal'. With money due to run out at the latest by July, new elections mid-June (that show massive support for the anti-bailout party), and the impacts on the real economy, exchange rate and inflation fears, and default and ECB balance sheet implications; it seems there are also strong incentives to keep Greece in. However, there is a political line of compromise and austerity that will be hard to cross for both parties which, if it failed - and it doesn't have much time - would mean a very fast 'ring-fencing' would need to occur for this not to thermonuclear with the three main channels of volatility transmission to the rest of the world being: banking and finance, trade, and confidence - all three of which are active already with Asian trade (and banking exposure) seemingly under-appreciated in our view with Singapore dramatically exposed with a stunning 60%-plus of GDP tied up in European bank claims.
- As ZH warned last week, JPMorgan’s Trading Loss Is Said to Rise at Least 50% (NYT)
- Spanish recession bites, may be prolonged (Reuters)
- Obama Lunch With Boehner Ends With Standoff Over Budget (Bloomberg)
- Hilsenrath: Fed Minutes Reflect Wariness About Recovery's Strength (WSJ)
- N. Korea Ship Seizes Chinese Boats for Ransom, Global Times Says (Bloomberg)
- Greece Plans for June 17 Vote Under Caretake Government (Bloomberg)
- Hollande turns to experience to fill French posts (FT)
- ECB Stops Loans to Some Greek Banks as Draghi Talks Exit (Bloomberg)
- Spain Urges EU to Provide More Support (WSJ)
- North Korea resumes work on nuclear reactor: report (Reuters)
- Fed’s Bullard Says Labor Policy Is Key to Cut Joblessness (Bloomberg)
- China Expands Scope for Short Selling, Securities Journal Says (Bloomberg)
- Facebook's selling shareholders can't wait to get out of company, increase offering by 25% (Bloomberg)
- Boehner Draws Line in Sand on Debt (WSJ)
- Romney Attacks Obama Over Recovery Citing U.S. Debt Load (Bloomberg)
- BHP chairman says commodity markets to cool further (Reuters)
- Merkel’s First Hollande Meeting Yields Growth Signal for Greece (Bloomberg)
- Greek President Told Banks Anxious as Deposits Pulled (Bloomberg)
- EU to push for binding investor pay votes (FT)
- Martin Wolf: Era of a diminished superpower (FT)
- China’s Hong Kong Home-Buying Influx Wanes, Midland Says (Bloomberg)
- U.N. and Iran agree to keep talking on nuclear (Reuters)
- US nears deal to reopen Afghan supply route (FT)
Last week the hedgies were dumping, as the "momo whale" dumb money was chasing things higher on low volume intraday levitation. Today, idiot money (which is known thus for a reason) joins the dump fest. And according to Goldman, "the selling pressure is still muted." And unless the Politburo of the Developed World comes up with a Deus ex Printerium fast, muted may soon go to Max Volume.
Now that Europe is all the rage again, below we again summarize the key Euro-centric events through the end of the month, as well as all the sovereign bond auctions to look forward to (we use the term loosely). Finally, the squid summarizes the key events in the past week as well as the expected global catalysts in the next several days. Somehow we get the impression it will be all about the unexpected developments in the next 168 hours, especially with Spain, Italy, France and Germany coming front and center with a boatload of bond issuance as soon as 9 hours from now...
As noted earlier, and in the aftermath of both the UK and Spain officially double dipping, very soon a majority of Europe will be submerged under the latest recessionary tide which has already engulfed Spain, UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. The primary wildcard remains Germany, although there is a more than 50% chance that following some very weak PMI data, the country will follow up its already negative Q4 GDP print with another decline, officially pushing the European growth dynamo into recession as well (as for France which reps and warrants that everything is great, it is not as if anyone actually believes those numbers, especially after Hollande becomes president in one week). For everyone who wants to track the European double dip tsunami in real time, the following interactive chart from Reuters is just for you.
Goldman summarizes what to look forward to in the next few days, when once again fundamental will be ignored and all attention will be on the ECB. "The Week ahead will be dominated by global PMI and US labour market data as the two key releases. A few central banks meetings are on schedule, but market consensus suggests clearly that that ECB will not change its policy, while the RBA will likely cut interest rates by 25bp. There are also central bank meetings in Columbia, Thailand and the Czech Republic. The impact of these events on the FX markets, in particular the key activity data, will mainly be driven by the usual risk-on/risk-off mechanics. Moreover, with cyclical data generally weakening, chances are that risk-off currencies could perform relatively better this week. Some additional Yen strength is therefore possible, as well some under-performance of pro-cyclical currencies. The AUD may be worth some particular attention with the RBA meeting this week and the Chinese PMI - both key drivers of the currency."
The good news: Spanish Q1 GDP printed -0.3% on expectations of a -0.4% Q/Q decline. Unfortunately this is hardly encouraging for the nearly 25% of the labor force which is unemployed, and for consumers whose purchasing habits imploded following record plunges in retail sales as observed last week. The bad news: Spain now joins at least 10 other Western countries which have (re) entered a recession. Per DB: "Spain will today likely join a growing list of Western Developed world countries in recession. Last week the UK was added to a recession roll call that includes Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. Debt ladened countries with interest rates close to zero have limited flexibility to fight the business cycle and this impotency will continue for many years." Alas, the abovementioned good news won't last: from Evelyn Hermman, economist at BNP - "The Pace of Spain’s economic contraction may increase in coming quarters as austerity measures bite more sharply." Of course, it is the "good news" that sets the pace each and every day, as the bad news is merely a further catalyst to buy, buy, buy as the ECB will allegedly have no choice but to do just that when the time comes. And something quite surprising from DB's morning comment: "If it were us in charge we would allow more defaults which would speed up the cleansing out of the system thus encouraging a more efficient resource allocation in the economy at an earlier stage." Wait, this is Deustche Bank, with assets which are nearly on par with German GDP, saying this? Wow...