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Ad Hoc Commentary

Thursday June 7th 2012

On A Red Clay Court, One Cannot See The Blood
 
European equities have opened higher so extending the Stoxx Europe 600 Index’s best price rally in 6 months, amid speculation global policy makers will take steps to revive growth.  We really hope they do.
 
No one in the Euro Zone can be in any doubt as to how serious the situation is, however, it is like watching a baseline rally at Roland Garros and yesterday the ball was driven hard and firm into the politicians/bureaucrats court by the ECB. But therein lies the trouble with Europe, clay courts are slow and we are deep into the 5th set...with no tie break and the only liquidity is the sweat on tired and worried brows.
 
Mario Draghi clearly stated that the problems that confront the Euro Zone are not going to be solved by monetary policy alone ... indeed he gave total clarity in stating that no one should ever believe that a reactivation of the SMP had infinite scale or scope. The Italian has a mean backhand!
 
One can read that the EU President, Herman Von Rompuy is actively working on a pan European Banking Union structure...but such an program  is not going to come into effect within a concise enough timescale to ride in and solve the banking problems that face Spain. With all due respect to the EU President, it is rather like he is just a scampering ballboy, trying to tidy up the court.
 
This is just typical of the Euro Zone...there has been no long term planning, just long term denial that problems existed and now at the 11th hour there is a panic to gear up and craft a solution...but a solution that is acceptable to Spain.  That is such nonsense...if Spain wants help it can be offered but Spain must accept that with assistance comes a cost. Of course no right minded person would wish or indeed expect Spain to endure more austerity than it currently is facing...Rajoy has certainly applied austerity in a fierce and full manner but the Kingdom will have sacrifice a large degree of financial sovereignty.
 
 
Staying with Spain, just 2 days after a massive foot in mouth gaff was made by Budget Minister Cristobal Montoro Spain tried to sell as much as EUR2Bn of 10 year bonds.  It has got the paper away but at a yield of 6.044% cf. 5.743% on April 19th, but once again the paper is only finding domestic buyers.
 
In the open market the 10 year paper trades at 6.138% and that is at the base of a channel that saw yields start to rise on March 1st.  The Spanish paper has been swept along on a hope and expectation that aid will be heading to Spain to solve the banking crisis. We at Spotlight question if all this is simplistic buying on the rumour and hope?  What we do not know yet is:
 
  • When will banking aid be given?
  • What form will it take?
  • How much will it be?
  • Does Spain have autonomy?
  • Or do exogenous agents control the purse strings?
  • What price will Spain have to pay?
  • Will Rajoy be able to accept that price?
The devil will be in the detail!
 
It is clear that Spain cannot raise adequate funds in the capital market so as to address its own domestic dirty laundry. It needs help. The state of the banking system is not just scarred by bad loans, there is no confidence to lend even to decent private sector operations and so the curse of unemployment still blights the nation. The summer will bring nothing more than marginal, seasonal relief. It may well bring more unrest on the streets.
 
Quite frankly the movement of 10 year yields in the secondary maket from 6.700% to 6.138% is unrealistic and this supericial strength should be exploited as a wonderful selling opportunity.  But for the time being...Spain is likely to dodge a bullit as the focus ...like a high lob on a clay court goes back to the perienel sub base line bad boys of the Euro Club Med...Greece.
 
Steve

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