just in in-tray, per greed n fear
· GREED & fear continues not to believe in the durability of the current global rally in “risk” assets. An obvious problem with the recent rally has been the lack of trading volume. Another problem has been the lack of supportive action from the credit markets. When credit and stock markets diverge, GREED & fear’s experience suggests that investors should heed the message sent by the world of credit.
· Financial markets’ fate in coming weeks and months will continue to be decided primarily by what is determined in Euroland. It is now evident that Berlin has not conceded to the French request to turn the EFSF into a bank and a lender of last resort. EFSF expansion not only threatens France’s triple-A credit rating but also ultimately Germany’s.
· It remains very difficult to get agreement within Euroland despite today’s overhyped announcement following the conclusion of the latest “Euro Summit”. The fundamental problem is that the Germans have a deflationary bias and the Latinos in Euroland an inflationary one.
· The bigger the Greek haircut, the more other European nations will lobby for similar treatment. GREED & fear simply does not believe that the Greek issue can be “ring fenced”.
· GREED & fear’s view remains that, while some form of incremental “progress” is likely, nothing will be done to solve the fundamental cause of the crisis unless a “euroquake” forces the relevant politicians to make the necessary decision between fiscal union or break-up.
· GREED & fear’s core view remains that a euroquake is coming sooner or later, and that euroquake should coincide with more deflationary market action, be it a commodity correction or a deleveraging rally in the US dollar. The critical point for the Eurozone remains how Germany will react when hit by the anticipated euroquake. GREED & fear’s bet is still on the endgame being fiscal union.
· Investors in Asia should continue to hedge long positions by remaining short European financials. This is not only because the relevant stocks face further losses or “voluntary” haircuts leading quite possibly in future to nationalisation given growing public hostility to bank bailouts. It is also because the euro is almost back at the top of its recent trading range.
· The most interesting development of the past week was the sell off in the US dollar prompted by Fed governors giving speeches calling for more balance sheet expansion. GREED & fear would interpret these speeches as part of a process of preparing the way for QE3. The Fed leadership is concerned that deflationary pressures are rising again and is rightly concerned about the potential catalytic role a European crisis can have on such a development.
· A euroquake should be dollar bullish given European banks’ clear need for dollar funding. But conversely, a willingness of a Bernanke-led Fed to embark on QE3 at the first sign of Euroland stress should be dollar bearish. For now GREED & fear will side with the dollar over the euro, most particularly as the new head of the ECB Mario Draghi is likely to cut rates sooner rather than later.
· The recent improvement in the American data is only relative in the sense that the American economy has stalled rather than collapsed. Still the risk of a so-called “double dip” is growing, as reflected by the declining new mortgage applications index and small business confidence index. The US economy is not going to recover properly unless the housing market does, while small businesses will be the main generator of any further hoped for pick up in employment.
· The latest “social financing” and bank lending data in China show a continuing deceleration in the rate of growth on an annualised basis. Still none of this suggests an imminent easing in China. The most likely trigger of a U-turn in China policy remains a euroquake, and that has not happened yet. Indeed the more risk assets rally globally, the less likely becomes aChina easing.
· The Reserve Bank of India raised the repo rate again this week by 25bp to 8.5% and now looks poised to go on hold. The issue in India remains the extent of the slowdown in investment and credit growth and the extent of the pick up in NPLs.
· The Bank of Japan’s balance sheet has begun to shrink again in recent weeks. The BOJ announced today it would expand its asset-purchase program by Y5tn to a total of Y55tn. Still the issue with any such announcement is the will to implement it since the BoJ has not yet met the targets of its previously announced asset-purchase programme.
· The reluctance to execute proactively on previous “unorthodox” monetary policy initiatives is because BOJ governor Masaaki Shirakawa does not really believe in quantitative easing. This is why the yen can go higher in nominal terms in a world where the developed economies remain deflationary. This is also why in a euroquake where the US dollar rallies on deleveraging, the one currency likely to be stronger than the dollar is the yen.
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