“You may have to fight a battle more than once to win it” – Margaret Thatcher
Over the weekend the world looks a little bit more stable from a political perspective as Silvio Berlusconi stepped down after the successful passage of the austerity bill and his successor, Mario Monti, has been asked to put together a government which we should receive details of at some point today. In addition to this the new Greek government is being put in place and whilst yet we do not have the full detail of the plan ahead, we at least know who will be responsible.
The relative positivity of the political developments in the Eurozone periphery is however largely priced in to the market as expectations going into the close have merely been confirmed. The USD, after an initial sell-off overnight is on a slightly stronger footing already this morning and with little first tier data today the biggest event for risk and market sentiment today will be the Italian five-year bond auction at 10am. I would expect that whilst there is still little motivation, as far as I see things, for non-public, non-domestic sector investment into the peripheral bond market when the situation remains so uncertain, today’s issue will likely be taken up by the Italian banks. A successful Italian auction should be seen as a mild positive for the EUR this morning, however, after that and the political developments over the weekend, further good news may be harder to come by.
This morning’s press highlights the fact that many firms and institutions are in the process of running scenario tests and even beginning to rebalance portfolios, assets or exposures, in anticipation of severe operational risks arising from a Eurozone breakup. Reportedly Schroeders have stated that it “will not take term exposures with any bank that clears with a bank in a euro periphery country.” Acceptance of only the ‘strongest’ borrowers {US, UK, Switzerland, Germany} will likely further stretch the rate differential and push down longer term funding costs, potentially making the problem worse.
“By now you should’ve somehow realised what you’ve gotta do” – Noel Gallagher
Jens Weidmann, the Head of the German Bundesbank repeated his opposition to the prospect of the European Central Bank becoming a lender of last resort to the governments of the Eurozone. The issue thus remains, despite the impressive bounce in Italian BTP’s causing the 10-year yield to drop back to 6.35 this morning from the unsustainable 7.48 last week, the motivation for non-domestic private sector investors to resume buying government bonds appears weak. Without them however, or the ECB, it is difficult see a sustainable way forward.
Monetisation from the ECB, whilst a seemingly bitter pill for the German psyche to take, is likely the only long-term solution to the financing concerns of the Eurozone. Hyper-inflation fears remain the core objection of the Bundesbank et al but there are increasingly few options left on the table. If things take a further turn for the worse, the ‘nuclear option’ from the ECB may be more palatable than the alternative.
Elsewhere, in the UK press speculation of a single investment vehicle for UK infrastructure projects, alongside a credit easing scheme to get money into the SME market, are being mooted ahead of the chancellors ‘growth package’ to be announced in a couple of weeks. In Asia, stronger than expected Retail Sales data in New Zealand and a slightly better than expected Japanese GDP release, at an annualised rate of 6.0 percent, left the risk backdrop a touch more positive. Equities and developments in the Eurozone’s peripheral bond market will likely be the core drivers of the day. My core views however that AUD and EUR underperform USD and GBP remain unchanged from last week.