Repetitive behaviour

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Risk assets and currencies were walloped on the first day of the new week, not helped by the deteriorating situation in Spain, Italy and Greece (see below). Moody’s contributed to the pervasive pessimism by announcing that the outlook for the Aaa credit rating of Germany, the Netherlands and Luxembourg had been lowered to negative, citing risks that Greece might exit the euro and the potential financial burden of supporting the likes of Spain and Italy. By the end of the current quarter,

Moody’s will also have made a decision on the Aaa rating of both France and Austria; both were placed on negative watch back in February. Most major European bourses were down by over 2%; in Spain, stocks declined 12% in less than two days before the authorities decided to follow Italy’s lead and put a ban on short-selling shares for three months. In currency markets, high-beta currencies such as the Aussie fell by more than 1%, and the euro fell below 1.21 to a new 2yr low. Both the dollar and the Japanese yen prospered, with the dollar index reaching a 2yr high.

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Commodities fell sharply, copper down more than 2%, oil prices more than 3% lower at one stage and gold down almost USD 20 from its high for the day. G4 government bond yields continued to fall to new depths, while yields in both Spain and Italy soared. Overnight, the mood has stabilised slightly after a preliminary reading for HSBC’s China manufacturing PMI for July came out stronger than expected.

Commentary

Spanish woes. Fresh carnage in Spain yesterday, with the 2yr yield at one stage up a further 90bp at 6.66% and the 5yr yield 50bp higher at 7.4%. For a country mired in a deep recession, with property prices collapsing and banks significantly under-capitalised, it is no surprise that the situation has come to this. Not helping is the greater clarity regarding the dire financial predicament of many of the regional governments. On Friday, Valencia announced that it would apply for assistance from the new FLA (Automatic Liquidity Fund) set up by the central government to attempt to support the financing needs of troubled regional governments. Apparently Catalonia is considering a similar approach. According to El Pais, another six of the 17 regional governments will soon be making the same application. The debt of the regionals totals EUR 145bn, roughly 1/8 of Spanish GDP. Moreover, some EUR 16bn of regional debt is maturing in the current half year. Meanwhile, Spain is in riot mode, with miners, civil servants and fire-fighters already massing in the streets and an increasing disillusionment with the aloof management style being adopted by the Rajoy government. Soon, the caterers in Brussels will be very busy again.

The troika returns to Athens. Now that Greece has some semblance of government again, the troika returns to Athens in coming days to discover how the country is progressing with its efforts to meet the bailout targets. It is almost certain to be disappointed. Prime Minister Samaras suggested over the weekend that Greece was in a deep depression. Together with the extraordinary inefficiency and corruption at the heart of tax collection in Greece – not to mention the culture of tax avoidance – the troika will discover that government revenue is well short of expectations. For its part, Germany seems increasingly prepared to cut Greece loose. Vice Chancellor Roesler stated on Sunday that Greece cannot receive any more payments unless it meets its obligations. To make his position crystal clear, Roesler said that he was “very sceptical” that Greece could be rescued and that the fear of Greece’s exit from the euro no longer terrorises like it used to. The IMF froze any further disbursement to Greece back in March and will not even consider giving the country any more funds until the troika reports back next month. Last week, the new government announced EUR 11.5bn of spending cuts, although exactly where the axe will fall is not yet clear. Finance Minister Stournaras will present this latest package of measures to the troika this week. Greece needs the funds in order to pay back a bond maturing in August; most of this bond is owned by the ECB. Speculation regarding a Greek exit from the euro is likely to become feverish again in the near term.

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