Dangerous being short?

Just a very short note today, as I’m tied up.

Yesterday, the UK authorities announced pretty interesting measures to supply liquidity to UK banks, in case of difficult markets, if this weekends Greek elections results in Syriza winning. As you know, I don’t believe that will be the case, but the UK authorities are putting in place precautionary measures. In addition, Mr Draghi stated that “the ECB has the crucial role of providing liquidity to sound bank counter parties in return for adequate collateral. This is what we have done throughout the crisis….and this is what we will continue to do”. He added that EZ Central Banks “will continue to supply liquidity to solvent banks where needed”, though he refrained from providing details. (source FT)

The BoJ, Mr Shirakawa, stated that central banks had a common understanding of the importance of stability – code for coordinated Central Bank action, if necessary. (source FT)

UK financials are up between 4.0% to 6.0% today, with EZ financials up, by similar amounts – great news.
To be short the financial sector at present is, in my humble view, a really high risk strategy.

I will repeat that I believe New Democracy will win this weekends general elections in Greece, which will produce a relief rally. The EZ will offer some concessions, but the Greeks will not deliver and, at some stage in the future, will be forced to exit the EZ. At that time, the EZ will have to put in place steps to avoid contagion, which will be positive for markets. My view remains that the ESM will be granted a banking licence, so as to increase its firepower – the other alternatives (bond redemption fund, EZ wide deposit guarantee scheme, or Euro Bonds) seem less likely at this stage, though will be introduced at some time in the future. The ESM has to be enlarged as it will have to bail out not just the Spanish banks, but Spain itself. It is highly unlikely (indeed close to impossible) that EZ countries will increase their commitments, particularly as the proposed E500bn fund, assumes contributions from both Spain and Italy.

Yes, Greece has an amazing ability to disappoint. However, if in the unlikely event Syriza wins, Central Banks globally (including the FED) will flood the system with liquidity – they have basically told you that. In another words investors have, in effective, a free put on Central Bank action. Seems crazy to go or indeed remain short in those circumstances, especially when the market is excessively liquid and/or short. In addition, I cannot see the attractions of being long 10 year bonds – German and French, in particular at current yields.

The Euro is strengthening – another positive sign. However, even though the Euro may well bounce on better news from Greece, I remain bearish on the currency

I remain positive on, inter alia, the financial, energy, mining and London property sectors.

Kiron Sarkar

15th June 2012