While next to impossible, now may be a good time to ignore the constant barrage of meaningless noise and flashing red headlines, which not only are contradictory but prove that Europe is literally making it all up as it goes along. Today is a great case in point of a tangential detour which does nothing to change the reality that Germany no longer wants Greece in the Eurozone (remember, oh, yesterday), and that the ECB is merely playing possum with PSI creditors who will block the deal with even greater vigor than before (anyone recall the FT story about the PSI deal being on the verge of collapse not due to the ECB but due to private creditors?) as the ECB's even bigger subordination will simply make the amount of hold outs even greater. So while algos take the required 12-48 hours to figure out what just happened today, here is SocGen's Suki Mann stepping back from the endless daily din, and summarizing what is really happening in Europe.
The time for patching it up is over; Greece looks as if it can no longer stop the seams from falling apart. Restructuring (an economy) in a low (negative) growth environment simply does not work. The prescribed medicine (austerity) has failed; debt forgiveness (PSI) can't be agreed; and we are heading for debt default. The iterative process which defines the political response on these occasions has been unsuccessful, but the time for reflection will come later. It's been a tumultuous two years. The immediate investment case now focuses on contagion and its containment. Now we ask whether we're really better placed to handle a default - whatever form it takes? Orderly/disorderly, much of the corporate credit universe should come through relatively unscathed, but risk asset pricing will be impacted nonetheless. Technicals of sidelined cash and an opening New Year frenzy have got us here, boosted by ECB manipulation of peripheral risk (sovereign and bank) through the LTRO. However, nearing the end game of the Greek situation now sees us with a different reality. Spreads are moving wider, the periphery is suffering the most, while turnover and secondary market liquidity have fallen off a cliff as evidenced through widening bid-offer spreads. It’s not quite the November phenomenon, because then we had massive selling of French risk in particular, so as long as investors stay with it, the widening should be contained. As ever, we’ll be fighting against the market’s mantra over the past two years, which has been to shoot first and ask questions later.
And nowhere is this mantra more visible than in today's... actually make that everyday's EURUSD, and thus ES (thank you 100% recoupling between Euro and US risk) chart.