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from Global Investing:

Three snapshots for Wednesday

On Friday 283 companies in the S&P 500 had a dividend yield higher than the 10-year Treasury yield, at yesterday's close this had fallen to 266 but remains very high compared to the last 5-years.

Italian consumer morale plunged to its lowest level on record in May as Italians' pessimism over the state of the economy plumbed new depths.

Germany set a zero coupon on its new Schatz, the first time it has done so on debt of such maturity. The bid to cover ratio for the new bond at the auction was 1.7, compared with 1.8 at a sale of two-year debt on April 18.

The average yield at the sale was 0.07 percent.

from MacroScope:

Shifting euro zone sands

A telling moment. Before pretty much every showdown EU summit since the debt crisis exploded into life, the leaders of France and Germany have got together beforehand to agree a common strategy. It is a truism that the European motor only works efficiently when its two biggest powers are in accord.

This time, following the election of Francois Hollande as French president, there has been no such meeting. Instead he will talk with Spanish premier Mariano Rajoy in Paris before they head to the Brussels summit. There, Hollande will press for the currency bloc to start issuing joint euro zone bonds and will run into implacable German opposition that will squash the plan for now. But the plates are shifting and German Chancellor Angela Merkel looks somewhat isolated.

On euro bonds, Hollande can call on the support of Italy’s Mario Monti and the European Commission among others. Nonetheless, Angela holds the purse strings so while we will see some modest pro-growth measures agreed (and no doubt trumpeted), there will be no pump-priming that requires extra deficit spending, certainly no mutualising of debt and probably no hint that the likes of Greece and Spain will be given longer to make the cuts demanded of them (though that policy's time could soon come, depending on how the June 17 Greek elections go).

Greek contagion aside, Spain remains the bloc’s biggest headache largely because of the weight of bad debts dragging its banking sector down. One idea is to allow the euro zone’s rescue funds to lend to banks direct, thereby removing the stigma of a government having to ask for aid. But Berlin is not keen on this one either.

Less controversial are plans to boost the capital of the European Investment Bank, use “project bonds” backed by the EU budget to invest in infrastructure and recalibrate some EU structural funds which has been used to help poorer EU members so that it is spent in other areas which might yield a quick growth dividend. None of that can hurt. But peashooters and elephants come to mind.

The golden rule of this crisis is that red lines have and will be crossed, most notably by Germany and the ECB, if the bloc is teetering right on the edge. The first ones to give this time may be on relaxing debt-cutting timeframes and allowing the bailout funds to help banks direct. Euro zone bonds remain a long way off (probably only when all member countries have got their deficits sustainably below 3 percent of GDP) and talk of a bloc-wide bank deposit guarantee fund isn’t anywhere near, though the pace of events could change that. Much hangs on how Greeks vote on June 17.

A demonstration of just how bent out of shape the euro zone is will be provided by today’s German 2-year debt auction. Yielding about 0.07 percent on the secondary market, that means Berlin has set a zero coupon for this sale and will pay no more to borrow this money over two years, yet investors are still expected to snap it up, such is the desperation for something secure. The debt agency says it is not planning to start offering negative coupons.

from Breakingviews:

Hollande-Merkel agenda is more Greece than growth

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

With growth on the menu and Greece on their mind, François Hollande and Angela Merkel have reasons to dispense with the usual niceties for their first meeting. The French president chose to fly to Berlin to meet the German chancellor on the very day of his inauguration - and not simply because he wants to smooth over some of the rough edges of the electoral campaign. His trip is also an acknowledgment that there is a fire in the euro house: neither France nor Germany can afford to waste any time before trying to put it out.

The best thing the two leaders could say about Greece after their meeting is nothing. Merkel, because any utterance will only add fuel to the Hellenic conflagration. Hollande, because at this stage he could only mouth platitudes on the topic. But public silence should be matched by intense private conversation.

Both leaders are challenged by the new crisis. Hollande must go beyond the campaign rhetoric about the need for growth-friendly policies in Europe: the initiatives he has in mind are irrelevant to the immediate risk of a messy Greek exit from the euro zone. For Merkel, the challenge is to avoid making her rigid stance on Greek austerity the main obstacle to the formation of a new government in Athens.

A productive conversation would lead to an either/or agenda. Either the Greeks can at last form a government able to negotiate with its creditors - in that case France and Germany should design the outlines of a face-saving deal - or an agreement proves impossible and Greece finds itself outside the euro. Then a contingency plan must be ready.

A deal will be difficult to achieve if it creates a precedent for unhappy governments willing to renege on the commitments made in exchange for aid. But Merkel’s Social Democrat opponents, emboldened by their recent electoral victories, are asking for some growth-friendly policies themselves. So the chancellor might be willing to make some concessions.

from Global Investing:

Three snapshots for Tuesday

The euro zone just avoided recession in the first quarter of 2012 but the region's debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.

Click here for an interactive map showing which European Union countries are in recession.

The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.

from Global Investing:

Three snapshots for Thursday

The Bundesbank is preparing to stomach higher German inflation than it likes, above the European Central Bank's target level, because of the euro zone crisis, a source at the central bank said on Thursday.

Although the Bundesbank still wants stable prices across the euro zone, its latest comments show the bank recognises that upward pressure on German wage costs and property prices suggest its inflation is likely to rise above the bloc's average.

As this chart shows, historically the Bundesbank was quick to react to any signs of inflation:

The Bank of England voted on Thursday not to give the struggling economy another injection of cash as concerns over stubbornly high inflation outweighed the risk of a prolonged recession.

The number of Americans submitting new applications for jobless benefits edged down last week, easing concerns the labor market was deteriorating after April's weak employment growth.

from Breakingviews:

Dresdner bonus ruling thankfully won’t spark trend

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investment bankers have just found a way to make themselves even less popular. Over a hundred former Dresdner Bank employees on May 9 won their claim in London’s High Court against Commerzbank, for non-payment of almost 52 million pounds of bonuses awarded in 2008. The case is likely to enrage taxpayers. Thankfully, though, it won’t spark a trend.

On the face of it, the ruling sounds like a disturbing victory for pre-crunch selfishness. The bankers launched their legal action after Commerzbank slashed bonuses by 90 percent shortly after it took over Dresdner during the financial crisis. Given that Dresdner lost more than 6 billion euros in 2008, that seems entirely reasonable. The bankers might not have had jobs, let alone bonuses, if Commerzbank hadn’t stepped in.

But the case wasn’t about fairness. Instead, it rested on whether a verbal pledge made to Dresdner staff at a town hall meeting in August 2008, which promised they would share a 400 million euro “guaranteed minimum bonus pool”, constituted a binding contractual obligation. The judge ruled that it did. Commerzbank plans to appeal.

With taxpayers and shareholders up in arms about financial sector compensation, the prospect of investment bankers successfully winning payouts through the courts is disconcerting. Fortunately, however, the chances of others making similar claims are slim. The great flaw of pre-crunch bank pay was that it gave employers no comeback when previously profitable bets turned sour. These days, most bonuses are deferred and subject to clawback. If the same scenario was repeated today, the bonuses would have been reclaimed, or not awarded in the first place.

That probably won’t make German taxpayers any happier. But at least the victorious Dresdner bankers are the last of an entitled breed.

from Global Investing:

Three snapshots for Wednesday

This chart shows the wide dispersion in equity market performance so far this year. In local currency terms Korea has a total return of nearly 12% and Germany over 10%, this compares to Italy at-6% and Spain at -16%.

In contrast to last year, this has driven average correlations between equity markets lower.

However, correlations may well pick up if markets move back into 'risk-off' mode. The chart below showing the weakness in the Citigroup G10 economic surprise indicator seems to be pointing towards further weakness in bonds relative to equities.

from Breakingviews:

Let Germany inflate while others deflate

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Bundesbank keeps raising concerns about a possible surge of inflation in the euro zone. But the fears are premature at best. The European Central Bank hasn’t failed on that front. While the current 2.7 percent inflation rate is above the ECB’s official goal of “below but close to 2 percent”, it expects to be back on target in early 2013. The question is whether sticking to that stubborn 2 percent goal makes sense as recession threatens.

The ECB is keeping its key interest rate at 1 percent, much higher than the near-zero levels in the United States and UK. The economies’ near-term prospects don’t justify the euro premium. The euro zone’s gross domestic product will shrink by 0.3 percent this year, according to the latest International Monetary Fund forecast, compared to 2.1 percent growth in the United States and 0.8 percent in the UK.

The monetary purists at the Bundesbank fear that lower euro rates - or even too many months at the current level - will fuel inflation in Germany. It’s possible, even though in the year ended in March, prices rose by 0.4 percentage points less in Germany than in the euro zone as a whole. Faster growth in Europe’s largest economy could reverse the gap this year, especially if German workers succeed in their demands for higher pay after a decade of strict wage discipline.

Yet higher German inflation shouldn’t be feared, but hoped for. It would make looser monetary policy more effective where help is most needed. Prices are rising slower than the average in troubled euro countries like Greece, Spain or Ireland. Higher inflation in Germany would help them regain some competitiveness. And it would help rebalance the euro zone economy, after a decade when German exporters gained market share throughout the region.

Mario Draghi, the ECB’s president, is unlikely to say so, but in an ideal world he would: inflation in the euro zone is not a threat. And more of it in Germany could be good for Europe.

from The Great Debate UK:

Democracy vs. austerity

By Kathleen Brooks. The opinions expressed are her own.

Throughout history it has always been difficult to take something away from someone once you have given it to them. Europe is finding that it is extremely difficult to reign in public finances once they start to go out of control. Democracies don’t like to vote for austerity, which is why Sarkozy lost the Presidency in France, why a radical left party came second in the Greek elections and why the Conservatives got a drubbing at last week’s local elections in the UK.

This tells us something about democracy in the western world. Governments have to manage the public finances directly – they have to sell the debt, do the sums and present budgets. However, the people who vote them into (and out of) power are the public, who rightly in most cases, believe they have worked hard, paid  taxes and deserve the services and retirement promises made to them.

So here we have the problem: some governments in the West have unsustainable debt loads and deficit levels and yet they don’t have the popular mandate to try and bring that under control. That isn’t the story all over the west. The Germans and the Dutch agree that the government books should be balanced. But if you asked the rest of Europe if they wanted to reduce public debt levels to make country finances more sustainable at the expense of public services and jobs, the recent election results suggest that you would get a resounding no.

So there isn’t one unified way of thinking about austerity in the West. Some people see it as a virtue, others as a type of hell. So what to do? Europe’s one-type fits all model that is largely designed by Germany could lead to social disorder and radical political parties grabbing the reins of power in Greece. However, the more people fight against austerity the more unlikely it is that their governments can attract enough investors to buy their debt to fund their public spending needs.

So where does this vicious circle end? The answer is that no one knows. Now that the true state of public finances in Europe has been revealed it can’t be brushed under the carpet and the Greeks et al can’t go back to the pre-2007 ways of living and spending. However, the opposite – harsh austerity designed to reign in public finances at half the time it took to amass the debt in the first place - isn’t working either.

A more sensible plan is for Europe to reach some sort of compromise. Germany and Greece (as the two extremes) need to realise there are multiple views about what a democracy should provide and how public finances should be controlled. The next step is to plan a fiscal pact that allows countries to reign in public spending at the same pace as it amassed it in the first place – and fiscal targets should be spread out over 10 years rather than the current demands to bring down deficits to 3 percent of GDP by the next fiscal year. The UK could probably follow suit and realise that the debts took two parliaments to accumulate, thus it should take two parliaments to rein them in.

from MacroScope:

Germany’s zero bound

The ultra-low rates offered by two-year German bonds reflect just how worried investors have become about the euro zone debt crisis and the continent’s sluggish economy.

Two-year German debt is currently yielding only 0.09 percent. That is less than the 0.11 percent offered by equivalent bonds in Japan – whose central bank has been grappling with deflation for some two decades. It is also below the 0.26 percent offered by similar U.S. Treasuries after the Federal Reserve more than tripled the size of its balance sheet compared to pre-crisis levels.

Elwin de Groot, senior market economist at Rabobank, expects the euro zone's sluggish economy and intractable debt crisis to continue to favour a safety bid as long as policymakers do not take steps towards a closer fiscal union. He sees the two-year German bond yield hitting zero in three to six months and ten-year benchmark yields falling to 1.40 percent over the same period from 1.59 percent currently.

Peter Allwright of investment management firm RWC Partners goes one step further. He can envision a scenario where the German Schatz trades at significantly negative yields as the crisis unfolds.

There is going to be a huge shortage of triple A collateral in euros and if people start to price in the euro break-up scenario, people are going to be pushed into that.