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Monday, 11 December 2017

Positive signs in Portugal, but not out of the woods yet

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I was amongst those who took a bit of time off to follow the developments in peripheral European markets and was perplexed by the extraordinary moves in Portuguese bonds yesterday.

Anthony Peters, SwissInvest Strategist

On a day that saw the core outperform – 10yr Bund yields dropped 6½bp from 1.952% to 1.888% while Spanish 10yrs rose from 5.31% to 5.33% – Portugal developed a life of its own with the 10yr rallying 73bps from 11.89% to 11.16% and, more significantly, the 2yr note rallying 105bp from 9.56% to 8.91%.

Portugal is not out of the woods – Fitch has just published a report which confirms that the banking system is still pretty shaky – but the move reflects something of the mood which tells us that the worst of the eurozone debt crisis is over.

My enquiries as to what had caused this huge move in the market was met with the usual: “Domestic buying and some international short covering on thin volumes” which is tantamount to the ubiquitous “More buyers than sellers” but does this suffice to explain how the 10yr area in a developed eurozone bond market can move nearly three big figures without anybody knowing where it is coming from?

Perhaps one should not become quite so excited as is still leaves Portuguese yields above 11% and very much in distressed space. Sure, two weeks ago they were still well above 13% so whoever bought them back then has had a nifty near-10pt rally in the position. Does this rally reflect a more positive outlook for Portugal or is it really just a matter of a few players squeezing a very thin and low volume market for the fun of it?

Prime Minister Pedro Passos Coelho was first out of the blocks in crowing that markets were recognising the country’s significant efforts to re-balance the economy – he would do, wouldn’t he? But he must also recognise that the same markets are fed up to the back teeth with politicians calling every lit match a conflagration and every one tenth of one percent of an improvement in economic numbers a great turn-around. They remain sceptical – and quite rightly so too.

However, in their defence, I must refer to a comment made by the most excellent Suki Mann, credit strategist at Societe Generale, who reminded us in a piece last week that although the politicians have persistently been behind the curve, they have in the end always found a way through. What cannot be overlooked is that the 2yr yield at 8.91% gas dropped below 9% for the first time since April 2011 and much of this certainly has to do with the rigorous government policies. Add to that the expected strengthening of the twin bailout funds and one does get a scenario which looks less threatening. The IMF is also due to publish a status report on Portugal in the near future and that is broadly expected to be mildly encouraging as well.

Portugal is not out of the woods – Fitch has just published a report which confirms that the banking system is still pretty shaky – but the move reflects something of the mood which tells us that the worst of the eurozone debt crisis is over.

I have one chum in Paris who still believes that we are being exposed to smoke and mirrors by which the political classes are only concerned with their own short term survival and that they still have no intention of addressing the real issue of the unsustainability of the cradle-to-grave social model which Europe built for itself over the past fifty years, mostly funded by debt.

Mario Monti is touring Asia and telling all who will listen that the crisis is over and if perception really is reality, then that might well be the case. However, behind the rhetoric, Spain is about to blow through the deficit/GDP limits set by the recent accords and even the Netherlands, once part of the hardest of the hard core of the eurozone is set to unashamedly miss its targets too. Is the car thief who used to steal three vehicles a week but now only steals one now a virtuous and reformed character? It’s all in the interpretation.

 

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