MacroScope

Italy suddenly looks “peripheral”

Italy is the latest victim of market contagion in Europe’s ongoing debt crisis. The country has one of the largest public debts in the world, making investors worried it could be the next domino to fall given poor economic growth and domestic political tensions.

Both the country’s stock and bond markets have been under pressure. Italy’s short-term borrowing costs have already surpassed Spain’s, and long-term rates are well on their way to doing the same.

Nick Bullman, founder and managing partner of CheckRisk, told Reuters Insider that Europe’s bank “stress tests” were way too soft on Italy’s banks. He argues Unicredit and Intesa could need a minimum of 4.4 billion euros to plug the capital holes they face.

 

 

from Global Investing:

Jean-Claude Trichet, EM c.bankers’ new friend

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.

That's ptrichetrovided some relief to central banks in the developing world who have struggled for months to stem the relentless rise in their currencies.

Being short euro versus emerging currencies was a popular investment theme at the start of 2011, partly because of EM strength but also because of the euro zone debt crisis. "What that also means is that people who were short euro against emerging currencies had to get out of those positions really fast," says Manik Narain, a strategist at investment bank UBS. Check out the Turkish lira -- that's fallen around 5 percent against the euro since Trichet's Jan 13 comments and is at the highest in over a year. South Africa's rand is down 6 percent too. Moves in other crosses have been less dramatic but the euro's star is definitely in the ascendant. The short EM trade versus the euro  has more room to run, Narain reckons.

Banking on a Portuguese bailout?

portgualprotest.jpgReuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

from Global Investing:

Solar activities and market cycles

Can nature's cycles enrich our finance and market theories?

Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.

SPACE/SUN

Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).

But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.

from Jeremy Gaunt:

And the investor survey says…

Reuters asset allocation polls for August are out. They show very little change from July, which suggests investors are still cautious and uncertain about what is happening.

One big difference, month-on-month, was a large jump into investment grade corporate debt.  Andrew Milligan of Standard Life Investments reckons this  may in part  have been because  sovereign debt rallied so much over summer that returns from government bonds are now too meagre.

Here is the big picture:

Poll

ECB’s Stark takes aim at euro bears, rating agencies

Reuters/Ralph Orlowski

Reuters/Ralph Orlowski

Top European Central Bank policymaker Juergen Stark took aim at investors and ratings agencies for playing up worries about the future of the euro zone, accusing credit agencies of irresponsible behaviour and saying there was “no alternative” to the single currency.

“Markets are clearly, in the current circumstances, overshooting,” he told a Reuters Insider panel discussion in Frankfurt, saying investors were not taking the region’s economic fundamentals into account when they drove down the euro and drove up the cost of some countries’ debt.

Credit rating agencies compounded the problem by downgrading countries even as they announced ambitious plans to cut costs and debt, he said, pointing darkly to the possibility of  “vested interests” at work.

Lessons for Europe from the U.S. single currency

The euro zone is not the only large currency union in the world.  There is also the United States. While it may be pushing things to see California as Germany and Mississippi as Greece, there is still a disparity in the potential of the economies of the U.S. States.

Harvard economics professor Martin Feldstein, the former chairman of  Ronald Reagan’s Council of Economic Advisors, reckons the dollar zone could offer some help to the euro zone. U.S. state deficits are minimal compared with Europe’s, he says in an op ed piece for The Washington Post. Even cash-strapped California’s is only about 1 percent of state GDP.

The secret, according to Felstein , is that all U.S. states have constitutions prohibiting borrowing for operating purposes. Bonds for infrastructure projects, yes. For salaries, services or transport payments, no.

The nuclear option for financial crises

They finally realised how serious it was. With stock markets tumbling, bond yields on vulnerable debt blowing out and the euro in danger of failing its first big stress test,  the European Union and International Monetary Fund came out with a huge rescue plan.

At 750 billion euros (500 billion from the EU; 250 billion from the IMF), the rescue package is the equivalent of taking a huge mallet to a loose tent peg.  Add to that an agreement among central banks to help out and the actual purchase of euro zone bonds by Europe’s central banks and you turn the mallet into a pile driver.

That tent is not going anywhere for now.

Does this remind anyone of anything? How about a lot of small attempts to stop the subprime/Lehman crisis failing, only to be followed by the  likes of the $700 billion Troubled Asset Relief Program in the United States?

More German misery for the Greeks

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The rescue plan put together for Greece by its European Union partners was not working anyway — at least as far as financial market speculation was concerned. But then up pops Axel Weber, Bundesbank chief and European Central Bank governing council members.

Athens, Weber is said to have told German politicians, may need up to 80 billion euros in assistance in the coming years. That’s quite a bit more than the 30-billion euro aid mechanism agreed about a week ago.

Result:  The spread between Greek and German 10-year bonds flew out to a new euro lifetime high. It might also have been helped along by the International Monetary Fund Global Financial Stability Report saying:

ECB offers olive branch to Greece

Athens reacts to news of ECB collateral rule changes

They’ll be smashing plates in Athens tonight and it won’t be because it’s Greek national day.  Instead, Greek banks and investors will be revelling at the fact the European Central Bank came to the party with a big fat collateral present.

In December and January the ECB said it wouldn’t change its rules on what banks are allowed to swap for ECB loans, even if rating agencies downgraded Greek debt to the point of financial oblivion. However, with markets threatening to push the cradle of civilisation to the brink of ruin, they have decided that it wouldn’t be such a bad idea after all.

ECB President Jean-Claude Trichet said the ECB would extend looser collateral rules, accepting assets rated as low as BBB-, into next year rather than reverting to its previous A- threshold. Greece is currently rated BBB- by two of the three major credit ratings agencies.