would say germany is talking tough re 'no euro bond' and walking brave re the euro experiment
we know the argument points and can guess at the motivations
as the crisis (actually more of an issue of indecision) drags on, things and funds slow down in the flow, enhancing the crisis
and all the while all actually may be more about fiat money inflation ledger n balance sheet accounting for all at all levels than anything else
euro is surprisingly strong - what used to be a ceiling is now a floor - oops, there, i said it, and it shall ...
in the mean time, just in in-tray
· The longer the Eurozone crisis continues, the more likely that it ultimately affects Germany’s own credit rating. The “failed” German bund auction yesterday is the sort of market pressure that is likely to lead, sooner or later, to German agreement to a more overt move to monetisation by the ECB. But the German demanded quid pro quo for such a development will be a move to a more concrete fiscal union.
· Investors should continue to focus on the French-German bond yield spread. But they also now need to keep an eye on the absolute level of bond yields, both in the case of the French and German ten year bonds. This is because the time has now passed where it only made sense to look at spreads.
· The contagion in the Eurozone sovereign bond markets has been aggravated by the efforts not to trigger CDS payments in the proposed private-sector “voluntary” Greek debt restructuring. The result has been to motivate banks to sell their underlying bond holdings since they can no longer be sure that they can hedge these positions.
· The growing tremors mean investors still need to prepare themselves for a likely euroquake which will be deflationary in nature. Markets have begun to move in this direction with the US dollar beginning to rally again and commodities beginning to sell off. Still the surprise to GREED & fear is that the move has not yet gone further. There is plenty of scope for further declines if such a
deflationary shock hits.
· Australia’s fate is geared to that of the mainland Chinese economy, as reflected in the gearing of the export sector and Australia’s rising investment to GDP ratio.
· The Australian central bank has openly addressed the “dual-speed economy” with its relatively hawkish monetary policy since the financial crisis. The monetary tightening of recent years reflects the desire to manage the inflationary implications of the mining investment boom, as well as the need to cool down the housing market.
· The resulting monetary squeeze has succeeded in cooling down the residential property market. It is possible that Australia can avoid a house price collapse, most particularly if China’s command economy keeps going. Still the risks are surely all on the downside.
· The fundamental case for owning Australia banks is the 8% dividend yield. The dividend yield looks safe so long as housing does not collapse. While still wholesale financing dependent, Aussie banks are less leveraged than they were in the “GFC” when a government guarantee bailed them out.
· Still GREED & fear will maintain the longstanding zero weighting in Aussie financial stocks in the Asia-Pacific ex-Japan relative-return portfolio. The fundamental reason for this is the overvaluation of the Australian dollar and the structural decline in the banks’ RoE implied by the need to deleverage the balance sheet, combined with the real possibility if not inevitability of a significant house price decline.
· On the currency, the key issue will be how quickly the Australian central bank cuts interest rates. On housing, the risk is that the first-time homebuyer stimulus of 2009 has only delayed the adjustment. This may be at the cost of a bigger decline down the road.
· The move to ease reserve requirements for China’s rural banks this week should not be viewed as a prelude to dramatic easing in the mainland. Still it does make clear that the trigger for the numerous reserve requirement hikes in recent quarters no longer exists. That was the need to sterilise hot money inflows. Rather the reverse is now happening in the sense that the evidence is that capital is now starting to flow out of China.
· GREED & fear continues to believe there is no way that the PRC will ever allow a real liberalisation of the capital account. For the resulting risk of massive capital flight in the event of such liberalisation would remove one of the key pillars of the command economy.
· The growing potential for a sharp US dollar rally against the euro is also a reason why the renminbi is no longer a one way bet. Indeed if the euroquake hits, investors should expect Beijing to behave in the same way as it did in 2009. That is to stop the appreciation of the renminbi against the US dollar. Indeed Beijing may even be prepared to let its currency decline against the dollar.
· The key point to make about the failure of the so-called Congressional “Super Committee” to agree on savings of US$1.5tn before the 23 November Washington deadline is that the markets chose not to sell down the US dollar or the US Treasury bond market on the news. This suggests that the markets’ focus on US fiscal issues will be deferred until the Eurozone crisis is resolved one way or another.
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