Just one look at the whoosh higher in global markets in January and you’d be forgiven smug faith in the hoary old market adage of “Don’t fight the Fed” — or to update the phrase less pithily for the modern, globalised marketplace: “Don’t fight the world’s central banks”. (or “Don’t Battle the Banks”, maybe?)
Currency speculators boosted bets against the euro to a record high in the latest week of data (to end December 27) and built up the biggest long dollar position since mid-2010, according to the Commodity Futures Trading Commission. Here -- courtesy of Reuters' graphics whiz Scott Barber, is what happens to the euro when shorts build up:
This week’s evaporation of confidence in the euro zone’s biggest government debt market — Italy’s 1.6 trillion euros of bonds and bills and the world’s third biggest — has opened a Pandora’s Box that may now force investors to consider the possibility of a mega sovereign debt default or writedown and, or maybe as a result of, a euro zone collapse.
from Jeremy Gaunt:
One of the more bizarre aspects of the euro zone crisis is that the currency in question -- the euro -- has actually not had that bad a year, certainly against the dollar. Even with Greece on the brink and Italy sending ripples of fear across financial markets, the single currency is still up 1.4 percent against the greenback for the year to date.
No longer an idle “what if” game, investors are actively debating the chance of a breakup of the euro as a creditor strike in the zone’s largest government bond market sends Italian debt yields into the stratosphere — or at least beyond the circa 7% levels where government funding is seen as sustainable over time. Emergency funding for Italy, along the lines of bailouts for Greece, Ireland and Portugal over the past two years, may now be needed but no one’s sure there’s enough money available — in large part due to Germany’s refusal to contemplate either a bigger bailout fund or open-ended debt purchases from the European Central Bank as a lender of last resort.
Whether or not it’s likely or even a good idea, talk of Greece leaving the euro is no longer taboo in either financial or political circles. What is more, anxiety over the future of the single currency has reached such a pitch since the infection of the giant Italian bond market that there are many investors talking openly of an unraveling of the entire bloc. But against such an amplified “tail risk”, it’s remarkable how stable world financial markets have been over the past few turbulent weeks — at least outside the ailing sovereign debt markets in question.
from Jeremy Gaunt:
It seems as if almost everyone was surprised by Prime Minister George Papandreou's decision to hold a referendum on the euro zone's bailout package for his country. At the very least, it can probably be said that he is weary of being hammered from all sides -- his own party, the opposition, the people on the street, Germany, the tabloid press, you name it.
For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies. In short, the agreement reached in Brussels last night outlined a haircut on Greek government bonds of some 50 percent as a way to keep the country’s debt mountain sustainable over time. But anyone who had bought default insurance on the debt in the form of CDS would not get compensated as long as the “restructuring” was voluntary, or so says a top lawyer for the International Swaps and Derivatives Association — the arbiter of CDS contracts.
A fresh twist in Hungary's Swiss franc debt saga. The ruling party, Fidesz, is proposing to offer mortgage holders the opportunity to repay their franc-denominated loans in one fell swoop at an exchange rate to be fixed well below the market rate. This is a deviation from the existing plan, agreed in June, which allows households to repay mortgage installments at a fixed rate of 180 forints per Swiss franc (well below the current 230 rate). Households would repay the difference, with interest, after 2015.
What a friend emerging central bankers have in Jean-Claude Trichet. Last month the ECB boss stopped euro bears in their tracks by unexpectedly signalling concern over inflation in the euro zone. Since then the euro has pushed steadily higher — against the dollar of course, but also against emerging currencies. The bet now is that interest rates — and the yield on euro investments — will start rising some time this year, possibly as early as this summer.