The Eurozone deal, relief rallies and proper optimism
I was muchly tickled when Keith Mullin, editor-at large of the IFR picked up and congratulated me on my line in yesterday’s comment which read: “Today might be the day when markets finally stop underestimating the political will to keep the Eurozone intact but it could also be the day on which politicians cease underestimating the markets’ ability to find them out.” As of yesterday, we can tick off the first part; now we have to see what happens with the second.
Overnight news was full of excitement as to how positively US and Asian markets had responded to the news of the Greek settlement but within the overall context of recent volatility we haven’t really seen anything particularly special. US markets could just have well have rallied entirely on satisfactory corporate performance – we are after all in the meat of quarterly reporting season – and a three hundred-plus point move on the Hang Seng is nothing of particular note.
At best we are so far seeing a text-book relief rally. But for the markets to swing from getting over the discounting of the worst-case scenario to proper optimism is a long journey. Nevertheless, we are in for a nice rally in asset prices this morning. We have had so many of those in the course of the past eighteen months that I’ve given up counting.
The situation will no doubt be helped enormously by the length of the collective depression which has been stalking so many markets; an opportunity to feel good about things was bitterly needed. With a bit of luck the iTraxx Crossover Index will break back through 400 again today and press on.
Growth and fiscal integration
However, the one fly in the ointment is the way the Street has of late been looking for rallies to sell into. The Brussels settlement has not resolved anything at all with respect to the sluggish pace of the economy and as austerity measures are rigorously implemented across the continent, the most important element required for righting the ship drifts further out to sea, namely growth.
Before long, and with all likelyhood, enthusiasm (in as much as there is any) will begin to wane. That is where Part Two begins to kick in. I was chatting with a credit strategist here in London yesterday. His is a miserable job at the moment. Macro events dominate thinking to such an extent that his services are in little demand. That dovetails with a message I received from a large institutional investor asking me for my favourite short. I suggested that I thought German utilities looked rich, as did selective European telcos. He thanked me. Assuming that he was polling more than just my opinion, I asked what the feed-back might have been. Others tipped everything from UK retail through cyclicals to selected financials. The client in question closed his comment by writing to me: “Honestly, trading idiosyncratic credit opportunities ain’t the easiest right here.” A hundred points to Gryffindor.
The leaders of the Eurozone have done their thing and it would only be fair to say that they have done it a great deal better than most of us had expected. Nevertheless, hitting one duck on the fairground shooting stand does not win you the teddy bear. Beyond the German industrial performance there is still very little to celebrate and the squeeze on jobs and public sector expenditure will continue.
Fiscal integration is the actual holy grail and although nothing specifically was said about it yesterday, the points have evidently been set in that direction. Of course, the bon mot reminds us that when you are up to your arse in crocodiles, it is hard to remember that the original objective was draining the swamp.
Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. As state schools here in the UK break up today for the summer recess and the as holiday season formally begins, may your teenage children find that going away with the parents and at their expense isn’t the worst thing in the world while the ones in their twenties don’t suddenly decide that it is all they ever wanted.