Spanish 10 year yields above 6.0%

The Israeli PM, Mr Netanyahu has formed a national unity government by teaming up with the centrist Kadima party – which was losing support. The surprise deal (Netanyahu has talked about a September election) will result in the coalition having 94 (out of 120) seats in the Knesset. The deal also increases the chances of military intervention re Iran. The increased threat of military intervention may well result in oil not falling much further – indeed upside risk now must be considered – certainly not what we need at present. Brent is nearly 1.3% lower today – currently US$111.83;

Mr Asmussen, an ECB board member stated “Greece must be clear that it agreed to this rehabilitation programme and that there is no alternative if it wants to remain a member of the Euro-zone”. This suggests that the ECB is considering a Greek exit from the Euro. Well they better, because it’s certainly a possibility, though in my humble opinion, not yet;

German exports rose unexpectedly for the 3rd consecutive month in March, due to demand from outside Europe. Exports rose by +0.9% MoM, much better than the -0.5% decline expected. Imports rose by +1.2%. The trade surplus rose to E17.4bn in March, higher than the E14.9bn in February. The current account surplus increased to E19.8bn, from E11.7bn in February. The numbers suggest that 1st Q GDP will be better than initially expected;

German sources state that the Parliamentary vote on the ESM/fiscal compact will be delayed until mid June, presumably after the expected rerun of the Greek elections;

UK retail sales (for stores open for more than 12 months) declined by -3.3% YoY, the largest decline since March 2011. Bad weather and difficult comparables contributed to the decline, but these numbers are awful;

Moody’s is expected to cut the credit ratings of more than a 100 European banks. With this and the general chaos in Europe, you want to buy European banks – I thought not;

US job vacancies increased by +172k, to 3.74 (the most since July 2008) in March, up from a revised 3.57mn in February. The NFIB (small business) survey suggests an improvement in hiring by small businesses. The NFIB’s optimism index rose to 94.5 in April, the highest since February 2011, from 92.5 in March. In addition, weather related effects should have cleared. The data suggests that May’s NFP data may well pick up from the recent disappointing results in April, where payrolls rose by just 115k;


Spanish 10 year yields are back above 6.0%. The ECB should be buying a serious amount of Spanish bonds in the markets (at a discount, given prevailing prices) and subsequently allow Spain to benefit from the discount, thereby reducing Spanish debt to GDP and it’s borrowing costs. The outstanding bonds will, as a result, increase in value, helping out Spanish banks. They should do the same for Portugal and other peripheral countries.

The Spanish remain in denial as to the huge problems remaining in their banking sector. Current estimates (by Spanish authorities) of the sector requiring additional capital of just E50bn is a complete and absolute joke – the amounts required will be many, many multiples of this amount, though impossible to estimate.  Reports suggest that they are to force Spanish banks to provide a further E35bn – far, far lower than the amount necessary. The proposed announcements of a recap of up to E10bn for Bankia – expected this Friday – is, once again, too little to late – indeed yet another joke and certainly will not be believed by the markets and/or have any medium/long term positive market impact. The reality is that Spanish authorities have to undertake a one off and comprehensive resolution of their banking sector, as do others in the EZ.

Until the EZ’s banking sector is fixed, there is no hope for the region, plain and simple. This will require a huge infusion of funds – certainly not possible from the private sector. EFSF/ESM funds could be used – but do they have enough?. The ECB will (inevitably) have to get involved – it’s the only serious player around. An EZ bank bail out will (for political reasons) have to impact existing bank shareholders/bondholders, I would have thought (for political reasons at the very least), which is one (of the very many) major reasons I’m short the sector. Indeed, there is a scenario where the ECB/EZ countries could actually make some money out of this mess.

Greece looks the same old basket case and I believe that EZ policy makers are now considering their exit, though technically you cant force a country to exit. A number of you believe that the contagion impact from a Greek withdrawal will be unbearable on the EZ. Personally, I don’t believe you can afford to waste the time, effort and money on a peripheral country such as Greece, which will continue to prove to be a persistent problem and, as a result, you have to accept the inevitable. Better to concentrate on rescuing (permanently) Ireland and Portugal (and others?), which at least have a reasonable chance of coming through this.

Spain, well there is just not enough money around – the only credible player is the ECB. The EZ does not move until there is a crisis. However, with no other alternatives available, a Greek exit will force the ECB to, in effect, flood the system with funds ie serious QE, which is clearly necessary – one of the benefits of a Greek exit. Interest rates will also be lowered. Publicly, the Germans (for domestic purposes) will express outrage, but privately I believe they understand that there is no alternative, so long as they are not seen to be promoting such measures – some would say a totally irresponsible position/behaviour, but that’s clearly the case at present. The recent decline in oil helps in terms of inflation in the EZ. However, longer term, the German’s will have to accept higher inflation – there is no other alternative.

The Euro, well it’s below US$1.30, though has a long way (down) to go – in my humble view, US$1.20 is just the1st step of a material decline.

European markets are weak today, though I believe will continue to decline further, as I see no credible solution at present and/or the panic sell off that I need to see before I consider closing my shorts and reenter markets. However, I have read so many European market analysts who remain sanguine !!!! – what planet are they on.

The only good news is that Draghi heads up the ECB – he’s certainly one of the very few in the EZ who is not only competent, but also capable of solving this mess.

Short note today – I’m afraid I’m tied up.

Kiron Sarkar

9th May 2012

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