Will March Be This Year's Cruelest Month?

Knight Capital has released a sovereign roadmap Catalyst Calendar which is a must read for anyone who trades with more than a 15 millisecond eye on the markets. And while everyone is now focused on what is going on with the Chinese tightening regime (with expectations of two-three more liquidity tightening steps over the next several months) with much speculating over just how priced in all this is (not much if one looks as the Bombay Sensex or even the SHCOMP for that matter), the real focal point should once again be on Europe. The reason: March is coming fast, and March will likely be the cruellest month for Europe, and possibly for the stock markets, and serve as the catalyst to introduce QE3 in all its glory.

Why March?

From Knight Capital...

March Madness -Political Risk Is High and Rising

  • Funny thing about democracies is the feedback loop between electorates and national policy
  • Policy risk remains tethered to national, and even regional political risk across the European Union
    • Higher risk within coalition governments
    • Breakdown of coalition (i.e. Ireland) can lead to snap elections and uncertainty around policy action
  • Two primary sources of political risk as it relates to the Euro sovereign crisis
    • Stressed states (periphery Europe) lose the electoral support to carry out reforms, trim deficits, and curtail debt
    • Core Europe or payer states (e.g. Germany) lose electoral support to bail out Peripheral Europe or debtor states
  • EurozonePolitical Sound Bites:
    • “We believe that Ireland may be left with no option, in the absence of a renegotiated deal, but to write down the value of the bonds in the Irish banks or face the prospect of a hugely damaging sovereign default”
      • Fine Gael, Irish Opposition Party, February 2, 2011
    • “62% of [German] voters oppose further bail-outs of weak euro members….”
      • The Economist, January 13, 2010
    • “49% of Germans would like to have a return of the D Mark”
      • YouGovInsitute, December 26, 2010
    • It may be “useful for the €440 billion European Financial Stability Facility to buy government bonds”
      • Jean-Claude Trichet, January 26, 2011

Showing this visually:

The biggest concern: the refi cliff that is coming in March, in parallel with 3 Germal regional elections:

What is the deux ex machina proposed by the ECB? Why, the EFSF, which in our opinion is nothing less than a debt spiral. Luckily, Knight agrees (partially)?

And while sentiment on Europe has largely normalized lately, the truth is that nothing has been fixed.

Key Takeaways:

Primary catalytic events revolve around two key themes

  • Slippage on fiscal reform in the GIIPS
  • Popular (read voter) revolt in both the adjusting countries (e.g. GIIPS) and/or the paying countries (e.g. Germany)

Volatility should remain a defining market characteristic in the coming year as policy action attempts to simultaneously address

  • A sluggish economic recovery
  • High unemployment
  • Record levels of fiscal imbalance

Our question: just how many double POMOs will Brian Sacks release in the end of February and beginning of March to "buy" all of these incipient problems? Find out tomorrow at 2PM...

Full Knight presentation