Yesterday was risk on as the market basked in the warm rosy glow of the predicted European solution. This morning, the doubts are back. Pick your story: either it's hardliners demanding larger (and frankly more realistic) Greek default haircuts in the FT, threats of global recession driven from Europe on Bloomberg, Asian investors refusing to play in ST, or any number of stupid comments by the ill-informed shysters masquerading as experts circulating on the internet.
Big talking point seems to be what happens to the EFSF. I used the Puffer Fish analogy yesterday: the EFSF leverages itself up to a couple of trillion (essentially filling itself full of [hot] air) to look large enough to cope with any eventuality like an Italy default. The risk is that speculators would see through the defence, and still gobble it up. Then a client pointed out: Puffer Fish are among the most poisonous creatures on the planet (hence beloved by daredevil sushi enthusiasts).
The Puffer Fish analogy still works – the EFSF may be pumped up on hot air and rhetoric, but it will still slaughter markets if anyone takes a pop at it.
Methinks markets might just have got a wee bit carried away with themselves on the apparent good news yesterday. Aside from some gossip out of Washington, what suddenly changed that drove French banks 10% higher and Italian names limit up? Fervid markets overreact to the merest crumb of good news. (Unfortunately, there is even a film clip of me saying I was mildly bullish...my uber-bear credentials are tarnished…)
I expect markets are likely to remain sentiment driven and vulnerable to each rumour and sigh as the next few critical weeks unfold. As my learned colleague Mike says: “It’s like paying the deposit on a new house and ordering a Ferrari based on next year’s guarantee, only to find you lost your job in the meantime”.
However, this time I do reckon there is a base to the potential downside. That’s new. The fact we now know a solution is being hammered out around the gabfest that is Europe should limit the downside in coming days. While some kind of a European solution does look on the cards – what it eventually looks like is another thing:
i) Greece is going to default – whether it’s a 50% or 90% haircut is the critical thing. France is screaming penalty because the lower the haircut, the less pressured its banks will appear. But a realistic 90% haircut is probably better long-term. Get over it. Take the pain.
ii) A European bank bailout package has to be part of the solution – but what does that mean for banks that have to use it? Burden sharing? The political mood is such there is a serious risk of burden sharing being inflicted – a move that will trash faith in European banks for generations. So smart money is staying away from ANY potentially problematic names. (Actually, I will go out on a very unpopular limb here and ask: why are banks to blame? The European farce currently unfolding was founded in political delusion.)
iii) Long-term bank finance provision is going to have to happen – at the moment banks are struggling to fund. The recent reliance on covered bonds has created a negative vicious feedback loop: by offering collateralised debt banks have put investors off unsecured debt. Oops. The result is quality bank assets are now encumbered – thus banks are intrinsically worth less.
I shall start writing the book soon...how European Unity Ate Your House, Kids' Futures And your Pension.
I love the story Greece is going to collect its new property tax via electricity bills as the tax-gathering infrastructure is so weak. But, that kind of thing gives me hope – it's not ideal, but it's going to happen. On the other hand, the deficit remains above target and the social pressures are mounting!
Out of time and out of office for most of day – Jim is watching the phones in London. Meanwhile, on a day where French bank stocks could be under renewed pressure, Mikey-boy will be manning the ramparts of Fort Zinderneuf in Paris. (10 points for the reference.)
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Death Or Glory...Just Another Story – Is This The Moment To Be Brave
Newedge - Blain's Morning Porridge - September 28 2011
By Bill Blain, senior director, special situations, Newedge (as seen on TV)
Yesterday was risk on as the market basked in the warm rosy glow of the predicted European solution. This morning, the doubts are back. Pick your story: either it's hardliners demanding larger (and frankly more realistic) Greek default haircuts in the FT, threats of global recession driven from Europe on Bloomberg, Asian investors refusing to play in ST, or any number of stupid comments by the ill-informed shysters masquerading as experts circulating on the internet.
Big talking point seems to be what happens to the EFSF. I used the Puffer Fish analogy yesterday: the EFSF leverages itself up to a couple of trillion (essentially filling itself full of [hot] air) to look large enough to cope with any eventuality like an Italy default. The risk is that speculators would see through the defence, and still gobble it up. Then a client pointed out: Puffer Fish are among the most poisonous creatures on the planet (hence beloved by daredevil sushi enthusiasts).
The Puffer Fish analogy still works – the EFSF may be pumped up on hot air and rhetoric, but it will still slaughter markets if anyone takes a pop at it.
Death Or Glory...Just Another Story – Is This The Moment To Be Brave
Newedge - Blain's Morning Porridge - September 28 2011
By Bill Blain, senior director, special situations, Newedge (as seen on TV)
T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]
Yesterday was risk on as the market basked in the warm rosy glow of the predicted European solution. This morning, the doubts are back. Pick your story: either it's hardliners demanding larger (and frankly more realistic) Greek default haircuts in the FT, threats of global recession driven from Europe on Bloomberg, Asian investors refusing to play in ST, or any number of stupid comments by the ill-informed shysters masquerading as experts circulating on the internet.
Big talking point seems to be what happens to the EFSF. I used the Puffer Fish analogy yesterday: the EFSF leverages itself up to a couple of trillion (essentially filling itself full of [hot] air) to look large enough to cope with any eventuality like an Italy default. The risk is that speculators would see through the defence, and still gobble it up. Then a client pointed out: Puffer Fish are among the most poisonous creatures on the planet (hence beloved by daredevil sushi enthusiasts).
The Puffer Fish analogy still works – the EFSF may be pumped up on hot air and rhetoric, but it will still slaughter markets if anyone takes a pop at it.
I expect markets are likely to remain sentiment driven and vulnerable to each rumour and sigh as the next few critical weeks unfold. As my learned colleague Mike says: “It’s like paying the deposit on a new house and ordering a Ferrari based on next year’s guarantee, only to find you lost your job in the meantime”.
However, this time I do reckon there is a base to the potential downside. That’s new. The fact we now know a solution is being hammered out around the gabfest that is Europe should limit the downside in coming days. While some kind of a European solution does look on the cards – what it eventually looks like is another thing:
i) Greece is going to default – whether it’s a 50% or 90% haircut is the critical thing. France is screaming penalty because the lower the haircut, the less pressured its banks will appear. But a realistic 90% haircut is probably better long-term. Get over it. Take the pain.
ii) A European bank bailout package has to be part of the solution – but what does that mean for banks that have to use it? Burden sharing? The political mood is such there is a serious risk of burden sharing being inflicted – a move that will trash faith in European banks for generations. So smart money is staying away from ANY potentially problematic names. (Actually, I will go out on a very unpopular limb here and ask: why are banks to blame? The European farce currently unfolding was founded in political delusion.)
iii) Long-term bank finance provision is going to have to happen – at the moment banks are struggling to fund. The recent reliance on covered bonds has created a negative vicious feedback loop: by offering collateralised debt banks have put investors off unsecured debt. Oops. The result is quality bank assets are now encumbered – thus banks are intrinsically worth less.
I shall start writing the book soon...how European Unity Ate Your House, Kids' Futures And your Pension.
I love the story Greece is going to collect its new property tax via electricity bills as the tax-gathering infrastructure is so weak. But, that kind of thing gives me hope – it's not ideal, but it's going to happen. On the other hand, the deficit remains above target and the social pressures are mounting!
Out of time and out of office for most of day – Jim is watching the phones in London. Meanwhile, on a day where French bank stocks could be under renewed pressure, Mikey-boy will be manning the ramparts of Fort Zinderneuf in Paris. (10 points for the reference.)
Posted at 09:45 AM in News & Comment | Permalink