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Is that the chalk outline of Europe on the floor?


Date: Tuesday, November 29, 2011
Author: Brian Bollen's Blog

Newedge – Blain’s Morning Porridge – November 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: Bill.Blain@newedge.com

Is that the chalk outline of Europe on the floor, in the pool of blood behind the yellow keep-out incident tape?

Sorry for slightly late Porridge this morning – but I’ve already had a busy day ruining people’s breakfast viewing. As I catch-up on the screens I’m struggling to understand why markets are up? Perhaps it’s the buoyant US Black Friday spending bonanza that underlies strength?

But, can’t see it myself. Already this morning we’ve had a whole series of improbable rumours like Elite Bonds, EFSF leverage, and IMF €600bn-plus lending to Italy headlined in press and then denied. We’ve also got a blanket warning all European sovereign ratings are vulnerable – not just eurozone!  

Where do we go from here? After a torrid week for European bond markets – and what looked like a complete collapse in confidence in Europe's crisis management from global investors - this week isn't likely to get better.

A hefty auction schedule (which I’ve attached) will likely test the deep pockets of the ECB's SMP bond buying further. Italy’s €7bn BTP 14-, 20- and 22-year taps due tomorrow will be an interesting moment. We await it with some trepidation. View this photo
 

But, on the other hand, we're into the final auction phase of the year - so is this the time to buy bonds 'cheap' with high yields on the expectation yields start to normalise next year?

The prospects aren't encouraging. Last week's failed German bund auction was a pivotal moment, strongly suggesting the global buyer base has had enough of the European crisis. Anectodal evidence suggests institutional money is simply walking away from Europe.

The remorseless widening of European bonds versus tighter Treasuries and Gilts, and the widespread acknowlegement Asian investors are staying shy, highlights the 'step-away from the body… nothing to see here...' mood that now characterises European perceptions.

Yet, earlier this morning there was a kind of mini-rally on the back of a story in the Italian press the IMF is preparing to provide €600bn-€800bn lending to Italy. The IMF has already denied any such discussions are underway, so it feels like the market hearing what it wants to hear. And kinda of remarkable that Italy’s premier paper would publish an unsourced story like that.

Not that the IMF Italy plan sounded terribly credible: €600bn is an enormous sum - and raises far more questions that it could answer. Where is it going to come from? Is a similar amount available for Spain? How closely co-ordinated with the ECB/EU is it? Since participation by the EFSF would entirely drain its coffers, how is Germany going to be persuaded to pony up more in view of its constitutional legal constraints?  

So instead we head towards next week’s meeting with Germany dangling a carrot based on countries accepting a loss of financial sovereignty and EU oversight - the Stability Pact. It’s not terribly realistic. The sincerity of any 'agreement' at next week's meeting would be questionable. Unity has hardly been the dominant theme over Europe's 2,000-year history. The last two years of dithering on solutions to the debt crisis doesn't suggest anyone will make decisions quickly. And what national politician would risk electoral wrath by signing away national rights?

So the only way to address the remorseless widening in European government spreads will be unlimited ECB intervention – perhaps in the form of quantitative easing to placate German sensitivities. Even if it happens, it may already be too late. It feels the back of the euro has broken.

I got asked on Bloomberg this morning where value lies – it’s selective. Some analysts point to the corporate bond market, but in a banking environment where deleverage rules, normal funding channels aren’t working. So, you have to be cautious.

But, there still are enormous levels of cash in the alternative banking system – fund managers. The challenge for corporates in coming years is to find new direct access to funds...they ain't held by banks anymore. Got ideas on that topic.

Out of time..