"Wind The Speakers All The Way Up To 11"

Via Mint - Blain's Morning Porridge,

The phrase "Constructive Discussions" will have us all pulling our hair out within a few weeks. Markets will be rock and rolled by anything anyone says about the Fiscal Cliff. Get over it - markets tend to over-react. But while the world awaits an outbreak of American common sense, Obama is off to Burma. Yep. Setting the scene for the rest of the week - no doubt we will be hearing more about Fiscal Cliff, Greece, Spain and perhaps a leavening of Italian politics.

The received European news-flow, (ie the stuff the Euro Elites want to you read and believe), says progress on Greek Compromise and close to a solution on Tuesday with Schaeuble confident of "closing the funding gap". All of which means Greece is essentially solved - well for a while longer. As long as no one asks any difficult questions about debt sustainability and unlikely targets, haircuts for the ECB, or how the economy is doing, the Greece will be just fine and dandy.

Unfortunately some folk haven't been reading the script - Lagarde has woken up to the fact she heads an "international" organisation and says a solution must be based on reality, solid and sustainable. Asmussen says a new programme will be needed, and the EU Energy Commissioner (?) says debt restructuring for the "official sector" will happen and therefore real losses are unavoidable. er.. who let him opine?

This whole question of the ECB and other institutions sharing in Greek losses is crtitical - it will be the first time governments sustain real hits. The IMF's growing spat with Europe on Greece might potentially derail the cosy fudge Europe seems to be preparing for later this week. So. keep an eye on Greece next few days.

Spain yields continue to creep higher. Catalonia is demanding more government aid. According to Bberg BlueBay are predicting Spain will be forced to beg OMT aid next year as the sheer scale of its $207 bln funding load for 2013 comes to the fore. NSS moment. Bailout is going to cause substantial political weakness for the Rajoy government. Basically.. the problem has not gone away. If Spain takes a bailout, we suspect investors will demand other economies get the same protections, hence Italy next.

Last week the pro-Europe FT was telling us Italian voters and business love Monti. This morning a Bloomberg story suggests he'd struggle to take more than 36% of a popular vote. (Not that votes or elections have bothered him before.) I got taken to task on Friday night by a rather clever young Italian lady who was "bored" of my incessant attacks on Italy - but got forgiven when I explained my love of the country, the wine and the cars, but that the problem is political and the lack of energy to change the country. Italy politics have fractured into deeply unpopular rump mainstream parties and newly emerged local interest groups - which means there isn't any political gravity to enforce change. As a result, a government of "appointed technocrats" is the best shot. None of which will go down well with the 62% of Italians in a recent survey who said Monti should not be allowed a second term.

And a couple of comments in the press about Irish bonds over the weekend. It's well know Franklin Templeton has built up a substantial 10% plus stake in Irish Govies - so the question is this year's rally in Ireland on the back of one buyer, or has Ireland fundamentally improved? Actually nothing in Europe has changed. Ireland remains essentially flat-lined - as we pointed out a few weeks ago, booking European profits into tax-advantaged  Ireland does not mean Ireland is creating jobs...

Oh. Cyprus. well.. what more is there to say.. bust bust and bust.

Away from the immediate news, markets show no signs of slowing down ahead of the year-end break. New issue market is still hoppin (although we have seen some bonds underperform recently), and everyone is fully absorbed in the hunt for yield. There is a wall of money still to be invested.

Towards the end of 2011 the market looked at 2012 with severe doubts on the Euro. The main investment strategies were based around further European ructions and the likely spread of contagion - market was entirely wrong. Europe rallied.

For 2013, it's looking to be about deepening European recession, sustained low interest rates and minimal liquidity. On the other hand potential growth in the US could make US bonds look extremely unattractive.


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