in in-tray
· The announcement by Frau Merkel and French president Nicholas Sarkozy that they will be announcing “something” by the time of the next G20 summit on 3-4 November has raised hopes that the Europeans will finally get ahead of the markets. Still GREED & fear remains fundamentally sceptical that market expectations will be exceeded.
· There is one pressure point that might just precipitate more aggressive action that markets could celebrate. That is pressure from Washington. Given that the hugely leveraged European banks are continuing to access dollars via the Fed’s specially extended swap lines, the US has some bargaining power should it wish to deploy it.
· There will be an effort to “ring-fence” both European banks and European sovereigns from the effects of a likely pending restructuring of the Greek debt. Still it is unclear toGREED & fear quite how this can be done.
· Greece is not actually that leveraged in terms of its total debt to GDP, reflecting its lack of private sector debt excesses. What is making Greece’s situation so hopeless is the combination of its dramatically high debt servicing costs and the related failure of its political establishment to follow through on previous commitments.
· The only coherent end game for Euroland remains a formal move towards collective fiscal responsibility, which would ultimately address the fundamental cause of the present crisis. This is the financial fault line represented by monetary union without fiscal union. GREED & fear’s base case remains that the Germans will move decisively towards fiscal union when market pressures prove sufficiently intense.
· For now GREED & fear’s view remains that risk assets are vulnerable to renewed concerns on Euroland. GREED & fear remains tactically cautious on the euro and on commodities on the view that the rally in the US dollar, driven by deleveraging, is not over. The recommended hedge for an Asia or Japanese equity portfolio of shorting or underweighting European bank stocks will be maintained.
· The other point is how holders of European bank stocks or bank bonds will be treated in any future debt restructuring. On this increasingly political issue, the German may well again have a different view from the French given their natural desire for “pounds of flesh”.
· The “Occupy Wall Street” movement in recent weeks underlines the massive amount of political capital forfeited by President Obama on the political left when he opted to cave in to Wall Street special interests in the 2009 bank bailout. It also underlines the risks to holding US bank stocks and US bank bonds since the next time the political environment may not be so forgiving.
· In GREED & fear’s view this week’s SME support measures and Central Huijin’s buying of Chinese bank shares do not mean that China is about to start easing, though the Huijin announcement clearly indicates an official desire not to see bank shares fall further.
· GREED & fear’s guess is that the A-share market will need more evidence of an easing in policy to break decisively out of its recent trading range. What is needed to excite theShanghai market is a comprehensive easing of monetary policy. But that conflicts with the authorities’ continuing desire to get control over credit growth. GREED & fear’s bottom line is that it is going to take a Euroland crisis, or a “euroquake”, to trigger a more abrupt U-turn in China policy.
· For now GREED & fear will maintain the neutral weighting in China in the Asia Pacific ex-Japan relative-return portfolio. GREED & fear will also maintain the slight underweight inHong Kong where the annual policy address this week has reinforced concerns about the local property market, with the government sticking to its plan to supply land equivalent to 20,000 residential units for each of the next ten years.
· The biggest negative for the Asian asset reflation story, be it China, Hong Kong, Singapore or Korea, continues to be government policies designed to depress, or at least dampen down, local residential property markets. It may take a “euroquake” to cause a re-think of such policies in Asia given the importance of the residential property market in stimulating domestic demand.
· The continuing lack of such restrictive policies is why the Asean asset reflation story continues to look attractive both in absolute terms and relative terms. GREED & fear was surprised to see Bank Indonesia cut interest rates this week. But this will certainly do no harm to booming mortgage demand. Meanwhile, the floods in Thailand will only serve as further motivation for Thaksin’s sister, Prime Minister Yingluck Shinawatra, to implement her policies designed to stimulate domestic demand.
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