|
Kiron Sarkar
November 7, 2011
Hi there,
Initial reports (from a newspaper owned by Mr Berlusconi's brother) suggested that Mr Berlusconi was going to resign. However, Mr Belusconi quashed these reports and stated publicly that "reports of my resignation are without foundation". Furthermore, he threatened to stare down the "traitors" who want to oust him. Great spectacle, but I remain of the view that he has lost this gladiatorial fight - the blood on the sand is his. More and more of his supporters will desert him. Never underestimate a politician's ability to exit a sinking ship - and Mr B's gondola has plenty of leaks. He faces a confidence vote tomorrow. 10 year bond yields rose to 6.67%, as Mr B's refused to terminate himself - simply unsustainable, as the Italians will understand only too well imminently.
Interestingly, the ECB bought E9.5bn of Euro Zone (primarily Italian though some Spanish, I suspect - the ECB does not provide a breakdown) bonds last week, making a total of E183bn since the ECB's bond purchase programme started. Market commentators suggest that they have continued to buy ever since. The bond buying was the highest since mid September and more than double last week's. Mr Draghi took over at the ECB on Tuesday last week and today's announcement of the ECB's bond buying programme reflects purchases for the week to last Wednesday. It is unlikely that there were any meaningful amounts of purchases under Trichet, which suggests that the vast majority of bonds were purchased in the 2 days that Draghi was in control of the ECB. If I'm right, it appears that Draghi understands that he has to ramp up the level of purchases - next Mondays announcement will reveal all.
Euro Zone Finance Ministers are meeting to work on the EFSF. However,
don't expect an imminent announcement - the head of the EcoFin, Mr
Junker, suggests that an announcement will be made in December. The EFSF
had to pay a massive 104 bps over mid swap rates today to raise just
E3bn, to pay for the next tranche of bail out funds for Ireland - as
compared with just 17bps last time around. They had shelved their plans
last week - Japan appears the only interested party. Reports circulate
that the European Investment Bank is being targeted to provide financing
for European banks.
Whilst it remains the same gloom and doom, Euro Zone politicians have
finally understood that they have a serious problem, which needs to be
dealt with speedily. A speedy response is not the forte of Euro Zone
politicians, but I believe they are gearing up to respond - good news.
More names have been thrown into the ring as potential Greek PM's -
never heard of any of them. The Euro Zone is to ask all the Greek
political parties in the Unity Government to submit a letter confirming
that they intend to abide by the austerity measures promised, in return
for the bail out funds - a fat lot of good that will do, but it does
indicate more and more scepticism - about time.
Finally Mr Stark, an uber hawk (who will be leaving shortly) defended
the 25bps rate cut last week - sounds like a further 25bps in December
is coming.
Summary
I remain of the view that markets will rally if Mr B is forced out
(likely) and following some kind of response from the Euro Zone - in
addition, Italian bond yields should decline further.
Euro Zone politicians are (finally) focusing on the problems.
Hopefully, they will come up with a solution in the not to distant
future. Will be it be enough - unlikely, but it will plug a hole for a
while. However, for the first time, I see some positive action being
taken by the Euro Zone - certainly not before time. Don't underestimate
the resolve of the Germans to get it right in the end.
Another reason that I'm bullish.
Both Gold and Oil were up materially today - is the market expecting
Euro Zone QE - as you know, in my view its both inevitable and
necessary. I will, from now on, watch as to whether the ECB sterilises
its bond purchases.
US markets closed at their highs. European markets, having been
materially lower in the morning, rallied strongly, but failed to
maintain their momentum and closed below their highs.
The SNB is threatening to intervene to reduce the value of the Swissy
- Swiss manufactures are pressing for CHF1.30 to the Euro - clearly
their economy is hurting. Markets are nervous, given their statement
last time around ie unlimited intervention.
The Chinese continue to state that they will maintain their tight
monetary policy - in my opinion unlikely - a reduction in reserve
requirements in likely in the not too distant future - once again a
positive market move, if undertaken.
Have fun.
Best
Kiron
|
