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Kiron Sarkar
December 6, 2011
Hi there,
S&P partially spoilt my (equity rally) party (especially in respect of
my holdings of financials) yesterday by threatening to downgrade 15
Euro Zone countries - they placed them on negative credit watch. The
downgrade suggests that there is a 1 in 2 chance of an actual
downgrade within 90 days. However, S&P reported that they would
release their decision soon after this Friday's EU Summit. S&P added
that the long- term ratings on Germany, Belgium, Austria, Luxembourg
and Holland aren't likely to fall by more than 1 notch, though
France's and other Euro zone countries could fall by 2 notches.
Pretty interesting timing, but should strengthen Germany's resolve to
push through tough, binding, verifiable measures with automatic
sanctions, including ultimately throwing out serial transgressors
(Greece). A French downgrade (together with Spain and Italy at least)
is on the cards and expected, but the other AAA countries - certainly
not.
The news was released after European markets closed - though
interestingly, European markets were weak into the close. It did have
an impact, though I would argue that such a statement would, in normal
circumstances, have a MASSIVE impact - it did not, which just
reinforces my bullish stance. For example, the S&P, which was +1.8% up
at it's peak, closed +0.7% higher at the close. FTSE futures indicate
a -0.8% open, though it's early days.
The Euro clearly weakened on the news and is currently over 1 cent
lower against the US$, from it's high yesterday. I intend to retain my
Euro/US$ short. One concern is that it really is a crowded trade.
The EFSF is based on the fact that it has guarantees by AAA countries.
Given the S&P news, Is this the final nail in it's coffin - seems like
it. However, looks like a combination of ECB/IMF (potentially others)
will step up to the plate. However, ECB bond buying remains the most
potent weapon. I believe they will use it, in spite of the (only)
E3.7bn of bond purchases last week.
Germany and France yesterday reached a "comprehensive" agreement (as
they put it) in respect of the new fiscal rules to be proposed to the
Euro Zone. Essentially, private sector bondholders will not be asked
(ex Greece) to bear some losses in any future sovereign debt
restructuring. However, with collective action clauses remaining,
there is still the likelihood of potential voluntary debt
rescheduling.
Mrs Merkel succeeded in persuading France to agree to a revision of
the EU treaty (probably just to include the 17 Euro zone members, as
the UK will be difficult, to say the least, though she dropped the
idea of the European Court of Justice being the final arbiter - the
ECJ will merely be required to verify that a "golden rule" (which
obliges Euro Zone countries to work to a balanced budget" has been
properly introduced in the Constitution of each Euro Zone member.
Good luck with Greece.
The treaty amendments are expected to be passed in March next year.
Automatic sanctions will be imposed on countries that beach the fiscal
rules (budget deficits to be no more than 3.0% of GDP).
The ESM will be introduced in 2012, rather than 2013 as had previously
been the case.
FT Alphaville referred to the agreement as Germany 1, France 0. I
would agree. The concession on the ECJ is sensible, especially from a
democratic point of view.
Whilst on Greece, the IMF has approved it's E2.2 bn tranche of aid,
but warned of a "difficult phase ahead". Mission bloody impossible and
you know it, Mrs Lagarde. Will this be the last tranche of aid to
Greece, before the inevitable happens - who knows, but Greece in the
Euro is an impossibility. Whilst contagion threats remain, quite
frankly, Greece being kicked out of the Euro Zone will, in my opinion,
be positive.
Mr Berlusconi popped up yesterday - his party threatened to veto tax
increases on property. His real game is to get immunity from
prosecution. He is likely to continue to be a pain in the a..
Italian 10 year bond yields fell below 6.0% yesterday, though closed
slightly above - wonderful news - was sweating there for a bit. S&P
threat of a downgrade a bit of a nuisance, but will hold on to my
bonds.
Belgium has formed a Government and appointed a PM. Sorry Renaat -
apparently, most Belgium's were hoping that they would continue sans
government/PM etc;
Other non European news
The Australian Q3 current account deficit came in at A$5.6bn, in line
with expectations.
The RBA decided to cut interest rates by 25bps to 4.25% today -as expected.
Asian economies face "greater downside risks" reports the Asian
Development Bank ("ADB"). Unfortunately true in my view as their
economies are NOT DECOUPLED, and will face (probably greater) economic
headwinds if the US/Europe slow down. The ADB also warned of slowing
capital inflows - bad news for a capital hungry part of the world;
US November ISM non manufacturing unexpectedly fell to 52, from 52.9
in October - well below the forecast of 53.9. This is virtually the
1st disappointing economic data point from the US recently and quite a
surprise;
Mr Evans, head of the Chicago FED calls for more FED action.
Unfortunately, Asian markets are weakening further and gold is being clobbered.
Been instructed to do some Christmas shopping by the boss(my wife)
before I return to Ireland. In other words, go to go.
Best
Kiron
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