Nothing is certain but uncertainty itself.…

Newedge - Blain's Morning Porridge - August 30 2011

By Bill Blain, senior director, special situations, Newedge

Summer is over. September looks likely to be an 'interesting' month. Sentiment remains fervid, markets are jumpy after August's dramatic ructions and it won't take much to trigger further volatility and slippage. None of the event drivers like Europe or banks look solved. While Hurricane Irene proved a damp squib, the storm clouds around markets have the potential of making the next few months even more miserable.

Or will September see markets regain their poise, a sense of direction and much needed stability? There are reasons to be cheerful: recent US numbers suggest August's panic about double dipping into recession may have been overplayed. Bank of America breathed a sigh of relief on its capital position. Stock markets got through Monday higher. Trichet's acknowledgement the market’s uncertainty is at the crux of the crisis facing Europe, and that it needs to be addressed can only be a good thing. (Diagnosing the problem is critical to treating it!) He also played down European rate hike threats as European growth slows. (Or has it stalled?)

On the other hand, uncertainty remains the only certainty: even as Europe seemed less an issue, the ECB was in buying €6.7bn of bonds last week. Irish mortgage numbers get worse. Finland is still making noises about Greek collateral! Although stronger banks successfully tapped covered bonds last week – its not a market open for the weaker names. A bank funding crisis remains a threat.

Headlines in the Financial Times are about what a miserable month the hedge funds have had. Why? Because whipsaw markets meant the 'oh-so-clever' price and event relationships they identify and profit from whipsawed unpredictably. For instance: rational analysis couldn't foresee the effects of panic triggered by sudden focus on global recession fears that seized markets through the month. But, that's exactly what we'd expect to happen in panic-mode markets – thus opening new investment opportunities.

How much more uncertainty will plague bank markets? The FT has seen a letter from the International Accounting Standards Board (IASB) to the European Securities and Markets Authority to say it's not happy with the way some financials institutions are marking their sovereign debt exposures. Certain French institutions (let's just say they both end in NP) value their Greek exposure at 79% (the effective haircut under the new rescue), while a UK bank takes a mark to market level of 51 - properly reflecting where bonds have traded.

It’s up to the banks to determine how they access their risk - but I should imagine investors want to see the most realistic scenario: whatever is closest to 'dull, boring, predictable and true!' Clearly one is – and the other is …. 'optimistic'. Interesting to see what happens to the banks that have been 'economic' with marks if the new Greek rescue crashes.

Which it could yet do. Lots of hysteria in the weekend papers about the problems Merkel has holding her political majority together, next week’s German constitutional court meeting, and concerns about the EFSF’s ability to weather a new storm if Italy and Spain weaken again. With Berlusconi’s government appeasing the Northern League and watering down austerity taxes (effectively the rich North of Italy refusing to bail-out the inefficient spending in the poor South!) I’ll be intrigued as to how today’s Italy auctions go.

Very interesting comments on Bloomberg: investors saying the big issue for fund managers is the volatility and event risk: “politicians don’t come up with a solution. There is a risk the ECB may end its [buy] programme and there will be a massive hit on Italian paper”. It’s a very real risk.

Meanwhile… I am struggling to understand why the merger of two Greek banks, Alpha and EFG, is such a good thing? The stock prices of all the major Greek banks soared yesterday. Can't see why that is such a good thing? Knowing the likely process it just means key executives looking to solve crisis will be dithering to line their nests while Athens burns around them.

Out of time…