The election victory for pro-austerity parties in Greece failed to assuage fears over the eurozone’s future, as investors ratcheted up the pressure on policymakers by sending Spain’s benchmark borrowing costs to a new euro-era high. Markets initially rallied on news that New Democracy and Pasok, two mainstream parties that support the austerity conditions of the eurozone’s bailout, gained enough seats to form a parliamentary majority in Athens. But the optimism was swiftly deflated by dismal bad bank loan figures in Spain that underlined the country’s woes. http://www.ft.com/intl/cms/s/0/440d6138-b964-11e1-b4d6-00144feabdc0.html#axzz1yD9nH3Nh
Russia is setting aside up to $40bn for this year and next to shore up the economy in case the crisis in the eurozone escalates and spreads, and is dusting off a plan that would allow the government to recapitalise the country’s banking system. In his first interview with a foreign newspaper since his appointment as finance minister last year, Anton Siluanov said the government had agreed to create a reserve mechanism worth Rbs500bn ($15.4bn) for next year “for the direct financing of anti-crisis measures”. http://www.ft.com/intl/cms/s/0/1eea8e10-b94d-11e1-9bfd-00144feabdc0.html#axzz1yD9nH3Nh
The Brics nations announced late on Monday that they would begin a process to build a financial safety net, creating a joint pool of reserves to be used if any country faces sudden capital flight. Based on the Chiang Mai initiative between Asian countries, the proposal between Brazil, Russia, India, China and South Africa, would go far beyond existing agreements between the five emerging economies. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. Work on the initiative has already begun with the aim of an agreement at the 2013 Brics summit and demonstrates the concern among strong emerging economies that they will feel the cold winds of contagion from a deepening eurozone crisis. The size of the proposed safety net is expected to be announced on Tuesday. Guido Mantega, Brazil’s finance minister, said the Brics nations were strengthening their financial integration to underscore the faith investors should have in their economies and the move should also improve global confidence. “By creating financial solidarity among us, we will be even safer and stronger than we already are,” Mr Mantega said.http://www.ft.com/intl/cms/s/0/bfd6adfe-b9bb-11e1-a470-00144feabdc0.html#axzz1yD9nH3Nh
With the Greek ” (no) fix” investors will start focusing on the true elephants of Europe, with Spain in pole position for the moment. Market reflections by Peter Tchir.
The “Nothing is Fixed” rally continues to annoy most people. Just like last week, the refrains that nothing is fixed and nothing can be done are ringing out loud and clear, and once again markets have faded from overnight highs.
While the “Nothing is Fixed” rally is only possible because of government intervention and the fact that the “Everything is Broken” sell-off took the markets too low.
Much of the bad news that caused the “Everything is Broken” sell-off that took S&P from 1,402 on May 1st to 1,278 on June 1st have started to be addressed. The economic data globally continues to be weak. That is dangerous. A near term Greek Exit looks less likely, the problems at JPM seems isolated, contained, and largely over.
The “right” price for the market remains elusive and volatility will continue until the markets determine the extent of government and central bank intervention. A few good things have happened, and in general the tone has indicated a willingness to do more. Without more programs and details on existing programs, the markets will fade, but for at least a few days, a steep sell-off is unlikely until the policy makers provide a strong sense of their ability to do anything more.
If EU policy makers have learned the lessons of Sisyphus and the Fed decides to act rather than trying to catch a falling knife then look for another strong end to the week. In the meantime be concerned about the weakness, but don’t overreact as it seems that “fading the rally” and saying “nothing is fixed” has replaced much of the cheerleading the market is usually exposed to.
What to do about Spanish Bond Yields
Yesterday’s early bank bail out euphoria is gone. Investors realized quickly that the bail doesn’t solve the problems, especially not the Italian problems. Yields in both countries reversed, and are trading at “scary” levels yet again. The contagion is spreading. With the big underperformance of the MIB index, investors are now slowly shifting focus towards Italy, and don’t be surprised if Silvio Berlusconi comes back sooner than later. As we watch the developments take place in Spain and Italy, let’s not forget that France should be joining the camp later this autumn. From Businessweek.
The relief in Rome was short-lived. Italian bonds rallied early on June 11, the first trading day after European finance ministers’ weekend agreement on a $125 billion bailout for Spanish banks.
But within hours, Italian borrowing costs were creeping back up again, reflecting persistent market fears that the Continent’s third-largest economy could be the next to falter. “Contagion into Italy and other countries is a reality,” Joachim Fels, chief global economist at Morgan Staley in London, said in a Bloomberg Television interview as the bond rally petered out.
Mariano Rajoy, Spain’s embattled prime minister, on Sunday attempted to portray his country’s decision to seek as much as €100bn in European Union rescue funds for troubled domestic banks as a victory, saying his government’s budget prudence prevented a full-scale bailout that would have forced him to surrender sovereignty to Brussels. Spain has now became the fourth and largest eurozone economy to seek an international bailout. But Mr Rajoy, who had resisted any outside EU assistance since his centre-right government was voted into office in December, insisted the agreed loan from EU funds was solely to recapitalise banks. However, because Spain was able to take advantage of new provisions in the eurozone’s €440bn rescue system, it will avoid the kind of intrusive inspection of government books that came along with Irish, Greek and Portuguese bailouts. http://www.ft.com/intl/cms/s/0/4599be98-b2ed-11e1-83a9-00144feabdc0.html#axzz1xSNLBdRq
Alexis Tsipras, leader of Greece’s leftwing Syriza coalition, seized on news of the Spanish bailout to bolster his position ahead of next week’s crucial general election, which may determine whether the country stays in the euro. “The developments in Spain confirm the position we adopted from the start – that the crisis is a pan-European problem, and the way it has been handled so far has been socially catastrophic and completely ineffectual,” Mr Tsipras, who opposes the bailouts, told a newspaper. http://www.ft.com/intl/cms/s/0/c8e85ba6-b31a-11e1-83a9-00144feabdc0.html#axzz1xSNLBdRq
François Hollande was in sight of an all-important parliamentary majority following the first round of National Assembly elections on Sunday, vital to entrenching the authority of France’s new Socialist president a month after he was elected. If confirmed in the decisive second round next Sunday, Mr Hollande will be able to start implementing his growth plans, rejecting at least part of the austerity drive installed by his predecessor. http://www.ft.com/intl/cms/s/0/92dc223e-b317-11e1-83a9-00144feabdc0.html#axzz1xSNLBdRq
What about Spain and Italy? By Voxeu.
Anxiety about Spain and Italy’s bond spreads has returned with a vengeance. In this dangerous race to the bottom, Italy was in lead position back in November but Spain has now overtaken and is once again at the epicentre of the crisis. Spain’s macroeconomic imbalances are much larger than Italy’s, but, to grow again, both countries confront an enormous challenge in reorienting their economies towards export- and import-competing sectors.
There is no lack of ideas about what a growth policy for Spain, Italy, and other troubled countries in the European periphery would look like (see for instanceAlcidi and Gros 2012 on Spain). But most of these ideas misdiagnose the cause of the crisis as one of shortage of credit or of excessive austerity. The Eurozone crisis is at its root not a fiscal or banking crisis, but a crisis of competitiveness hatched over about 15 years, and reflected in large differences in labour cost, export performance, and balance of payments between the periphery and the core, notably Germany (Dadush et al. 2010). Accordingly, fiscal and banking remedies, while badly needed, will not – by themselves – durably resolve the crisis.
An important gauge of China’s manufacturing sector has weakened sharply, adding to the pressure on the government to take more decisive action to support the flagging economy. The official purchasing managers’ index for manufacturing fell to 50.4 in May, its lowest in five months, from 53.3 in April. Although it was the Chinese PMI’s sixth straight month above the 50 level, which signals an expansion of activity, the fall in the index highlighted a clear softening of growth momentum. High quality global journalism requires investment. As the first item of official economic data for May, the PMI offers a timely glimpse into how the Chinese economy performed over the past month. Many analysts and officials had believed that China was on track for a “soft landing” until a raft of poor data in April led to a flurry of growth forecast downgrades. http://www.ft.com/intl/cms/s/0/d2f17014-ab87-11e1-b675-00144feabdc0.html#axzz1wQ4tZnA1
The dramatic drop in Indian economic growth isn’t bothering the likes of Mahendra Saraf. A farmer, he works in a sector that has seen growth shrink to 1.7 per cent in the first three months of 2012 against 7.5 per cent in the same period last year. But Mr Saraf, 26, is confident the blow to his profits will be cushioned by government agricultural subsidies. “Global and domestic demand was not been very strong,” he says, “but the government buys excess grain at a fixed price, so we will get that money anyway.” High quality global journalism requires investment. Such safety blankets – the size of which vary from state to state and industry to industry – are among the targets of those who say the government of Manmohan Singh needs to take radical measures to restore growth in the Indian economy. With growth in the first quarter of 2012 rising at 5.3 per cent, the slowest rate in nine years, policy makers are panicking about how to turn things around. “It’s an absolute disaster,” says Omkar Goswami, head of the Corporate and Economic Research Group in New Delhi. “We went from nearly growing at 10 per cent to 5 per cent in less than two years . . . it’s very, very concerning.”http://www.ft.com/intl/cms/s/0/d9928116-ab13-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs. http://www.ft.com/intl/cms/s/0/25c39204-ab01-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
and much more below…
Russian billionaire Mikhail Fridman has resigned as chief executive of BP’s Russian joint venture TNK-BP, plunging relations between the UK oil group and its local partners into fresh turmoil. A person close to Alfa-Access-Renova (AAR), the consortium of Russian shareholders that owns 50 per cent of the company, said Mr Fridman quit due to a “breakdown in governance at TNK-BP”. “The Russian shareholders have lost faith in BP as a partner,” the person close to AAR said. “This partnership appears to have run its course and we are most likely heading towards some kind of disengagement.” http://www.ft.com/intl/cms/s/0/f334b2e4-a8aa-11e1-a747-00144feabdc0.html#axzz1w8XyzKzt
Spain’s prime minister has insisted his country will not need an international rescue for its banks as investors recoiled at a €19bn rescue of Bankia, sending the country’s borrowing costs over Germany’s to the highest level since the start of the euro. Bankia, Spain’s second-biggest bank by local deposits, would have collapsed if Madrid had not agreed to the rescue last week, Mariano Rajoy warned, adding that this would have risked bringing down Spain itself. http://www.ft.com/intl/cms/s/0/27f29710-a8a3-11e1-a747-00144feabdc0.html#axzz1w8XyzKzt
Steep declines in the euro symbolise the woes of Europe’s monetary union but could have a silver lining: the boost to exporters may offer some much-needed support to economic growth across the 17-country region. Last year, even as the euro crisis escalated, the currency’s value remained remarkably steady. In recent weeks, however, financial market sentiment towards the euro has turned decisively for the worse. http://www.ft.com/intl/cms/s/0/269aa5b8-a7dd-11e1-b8a9-00144feabdc0.html#axzz1w8XyzKzt
The technocratic government of Mario Monti has made significant progress towards overhauling Italy’s economy since it came to office last year, but has not done enough to combat tax evasion and the country’s sizeable black economy, an EU finding to be released this week has determined. The European Commission report, which is still in draft form and was obtained by the Financial Times before its publication on Wednesday, carries significant weight under new EU rules that give Brussels the right to fine and sanction eurozone countries that do not follow its recommendations.http://www.ft.com/intl/cms/s/0/960e4250-a7f2-11e1-b8a9-00144feabdc0.html#axzz1w8XyzKzt
In a country where wealth matters more than most – if only because of its extreme shortage – being a teacher once meant making a decent living. However, as salaries for corporates ector jobs have soared and those for professors have stagnated, the respect afforded to academics – and the subsequent desire of students to become them – seems to have done the same. A government panel said recently that India’s shortage of faculty staff could be “significantly higher” than the 40 per cent widely estimated. While the prestigious Indian Institutes of Management and Indian Institutes of Technology – which cater to less than 40,000 of India’s roughly 16m college students – are largely immune to the overall shortage, even they have come under fire for lacking top-quality professors.http://www.ft.com/intl/cms/s/2/6e5725ee-7cd0-11e1-9d8f-00144feab49a.html#axzz1w8XyzKzt
Newedge, a leading broker, is abandoning the Greek stock market in a sign of mounting concern over the country’s future in the eurozone. The broker has told clients that it will process only sell orders, and stop extending margin loans for existing positions in Greek securities, according to a memo obtained by the Financial Times. A list of securities subject to the new restrictions include foreign-listed shares and American depositary receipts for Greek companies including Alpha Bank, Coca-Cola Hellenic Bottling and Paragon Shipping, a New York-listed shipowner that is headquartered in Greece. http://www.ft.com/intl/cms/s/0/a2123114-a690-11e1-aef2-00144feabdc0.html#axzz1w8XyzKzt
Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil. The euro’s sudden fallthis month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514. http://www.ft.com/intl/cms/s/0/92f5c37a-a5a1-11e1-a77b-00144feabdc0.html#axzz1vr0JKlSp
Europe’s political leaders need to make a “brave leap” towards greater fiscal union to address the eurozone’s deepening debt crisis, the head of the European Central Bank urged on Thursday. Mario Draghi said his institution may have bought the eurozone time through its massive injection of cash into Europe’s banking system and sovereign bond markets but now it needed to embrace much closer integration. http://www.ft.com/intl/cms/s/0/281e032c-a5b6-11e1-b77a-00144feabdc0.html#axzz1vr0JKlSp
Wholesale brokerages including Knight Capital and Citadel suffered trading losses that could top $100m as a result of computer glitches in Nasdaq OMX’s software on the morning of Facebook’s trading debut last Friday. Problems with the exchange’s trading software meant the brokers were unable to calculate their precise shareholdings in the social network through more than two hours of share trading, people close to the firms said. http://www.ft.com/intl/cms/s/0/68cc8164-a5c5-11e1-a3b4-00144feabdc0.html#axzz1vr0JKlSp
All news below.