Monthly Archives: October 2010

Investors Beware: Crucial Week Coming Up

The coming week will be a kind of make-or-break for the global financial markets. Not only do we have a Congressional election in the US, we’ve also got the FOMC‘s decision on further quantitative easing coming up. In addition, the European sovereign debt problem has taken a turn for the worst, with the difference in CDS spreads hitting a record high on Friday.

“The next few days will have a crucial importance on both politics and economics.”

Gavan Nolan


The revival of political risks in Greece, Portugal and Ireland, and the growing potential of an Anglo Irish Bank debt exchange, caused the sovereign CDS spreads to widen further. The basis between the Markit iTraxx SovX Western Europe Index and Markit iTraxx Europe Index reached 53bp on Friday – the widest on record.

However, according to Markit.com, the SovX is trading with a considerable skew; “i.e. the theoretical level of the index is trading tighter than the index itself,” credit analyst Gavan Nolan writes in Markit’s weekly credit wrap.

And when comparing the theoretical levels of the two indices the difference is 36bp.

“A high level but nothing exceptional and well below the 47bp reached on May 6,” Gavan Nolan points out.

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Formerly Known As “Political Risk”

Politicians have been derided many times for their often shaky knowledge of economics.

Ronald Reagan’s supply-side policies were dismissed as “voodoo economics” by none other than George Bush in the 1980 presidential race.

And when Bill Clinton ran against George W. Bush in 1992, one of his most famous slogans was; “It’s the economy, stupid!

Probably one of the best indications of how deep the knowledge of economic and financial issues  are (in general) amongst our political leaders, sadly.

More recently, the newly appointed UK shadow Chancellor of the Exchequer Alan Johnson has faced opprobrium for his supposed ignorance, even half-joking that his first action would be to “pick up a primer of economics for beginners”.

But whatever their levels of competence – and many of them are more than competent – the actions and utterances of
politicians have a direct influence on the economy and asset valuations.

“Events in the euro zone’s periphery over the past few days have made this evident. Political instability in two of the most troubled countries in the currency club has caused a mini-revival of the volatility seen earlier this year,” Gavan Nolan writes in this weeks market wrap.

Greece’s spreads widened sharply this week, reversing some of the strong rally seen over the last two months.

The Prime Minister George Papandreou warned that “we have not yet escaped the danger. I am sounding the alarm”.

As if this wasn’t enough to deter investors, Papandreou threatened to call a general election if his party fail to win decisively in the upcoming local elections.

Then the finance minister George Papaconstantinou weighed in, revealing that the country has “serious tax compliance issues”.

“Those familiar with Greece will regard this as a truism, but if the sovereign is to get its fiscal house in order then it needs to fix this issue quickly,” Nolan points out.

The country’s budget deficit is expected to be upgraded by Eurostat to over 15%, and the sovereign’s spreads are still indicating that a debt restructuring might be the most likely – and least painful – way forward.

“On the other side of the periphery, Portugal – hardly a paragon of fiscal prudence – has its own political problems.” Nolan comments.

Budget talks between the minority Socialist government and the main opposition party, the Social Democrats (PSD), broke down on Wednesday. The latter party is insisting that spending cuts should make a larger contribution to the austerity package.

It is likely that a compromise will be reached before the final vote on the budget next month.

“Nonetheless, the uncertainty created by the deadlock caused spreads to widen and they are set to remain volatile until an agreement is reached,” Nolan notes.

“Political friction in the euro zone will no doubt be relevant to risky asset valuations next week,” the analyst writes.

The Risks of the Week

But any fresh developments are likely to be overshadowed by events across the Atlantic, as Tuesday brings the US mid-term elections.

The polls are predicting that the Democrats will lose control of the House and maybe the Senate.

“As investors digest the implications of possible political gridlock they will be hit by the FOMC decision the following day,” Gavan Nolan adds.

The markets have been pricing in additional QE for some time now, and are expecting a confirmation on Wednesday.

The big question is how big – and how gradual – the liquidity injection will be.

“Prior to both events are the ISM and Markit Manufacturing PMIs on Monday (services on Wednesday) and then the week ends with non-farm payrolls on Friday,” markit.com informs.

“The next few days will have a crucial importance on both politics and economics,” Gavan Nolan concludes.

Related by The Swapper:

Credits: PIGs Gone Wild

Marc Faber Expects Market Sell Off On QE2 Announcement

Chart Of The Day: Europe’s Web Of Debt

The Fight Against Currency War

Fitch Place Most US Banks On Negative Rating Watch

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Filed under International Econnomic Politics, National Economic Politics

Rally To Restore Sanity: Watch It LIVE From Washington

Jon Stewart‘s “Rally To Restore Sanity” is starting in Washington in under half an hour. It will be interesting to see how many people the famous comedian are able to gather in a “respectful disagreement” to discuss the issues that truly impact our lives (minus the political discord).

“We will send a message to our leaders! We are here! – but only until six…”

Jon Stewart


The Comedy Central have provided a link to the US capital where the rally is supposed to start in about 20 minutes. Click at the picture below, and follow this extraordinary event LIVE!

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(If that link doesn’t work, try this one.)

I anyone should find themself a bit puzzled over Mr. Colbert’s slogan “March To Keep Fear Alive,” here’s a little musical hint for you…

(Thanks to the very talented people at versusplus.com).

Related by The Swapper:

Jon Stewart’s Crusade To Restore Sanity

Jon Stewart Takes On Obama’s Chief Economic Advisor

Daily Show: Jon Stewart Finds Humor In The Foreclosure Crisis

Jon Stewart vs Jim Cramer

Please, Give This Man An Award!

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Filed under National Economic Politics, Philosophy

Credits: PIGs Gone Wild

On Wednesday Greece was the major troublemaker in the credit markets, a role that investors appeared to believe the country had left behind. Greek CDS spreads were relatively stable Thursday, but its fellow peripherals, Portugal and Ireland, compensated with further volatility.

“However, investors were happy to overlook sovereign debt problems and focus on earnings and economic releases.”

Gavan Nolan


Portugal’s spreads started widening Wednesday after budget talks between the minority Socialist government and the opposition Social Democrats broke down. The passing of the budget, which is proposing relatively severe austerity measures, is essential for the country in reducing its deficit. Thursday the Irish CDS spread made another jump.

“A nervy sovereign debt market wasn’t enough to stop risky assets recovering some of the ground lost yesterday. Another day of strong corporate earnings and an upward surprise on US weekly jobless claims figures provided ballast to a market still uneasy from revised QE expectations,” credit analyst Gavan Nolan at Markit Credit Research writes in his daily update.

Wednesday Greece was disturbing the peace in the market, a role that investors appeared to believe the country had left behind.

Greece’s spreads widened by over 70bp today, the largest move since the turmoil of June. The credit deterioration was prompted by the Eurostat revising Greece’s 2009 budget deficit to above 15%.

This is over five times the initial estimate of 3%.

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“I always believed that pigs go the slaughterhouse”.
(Walter Annenberg)

The Greek CDS spreads were relatively stable Thursday, but its fellow peripherals Portugal and Ireland compensated with further volatility.

Portugal’s spreads started widening yesterday after budget talks between the minority Socialist government and the opposition Social Democrats broke down.

The passing of the budget, which is proposing relatively severe austerity measures, is essential for the country in reducing its deficit.

“It seems improbable that the two parties aren’t aware of the delicate fiscal situation and it is likely that a compromise will be reached over the mix of tax and spend. But until then the sovereign will be vulnerable to spread volatility,” Nolan writes.

Ireland, a country that has embraced austerity with little opposition from the general public, also widened Thursday.

Unlike Portugal, its recent credit deterioration has in large part been caused by its broken banking sector.

Ireland’s budget deficit has spiralled upwards to 32% of GDP as a consequence of its support for banks, particularly Anglo Irish Bank.

“Investors received another reminder of the state’s painful exposure with the news that a group of subordinated
bondholders are planning to block the proposed debt exchange,” Gavan Nolan points out.

The bondholders are unhappy about the terms of the exchange, which they view as unfair.

But the Irish government has already stated that the terms are non-negotiable and has intimated that it will turn to legislation if it faces opposition.

“Nonetheless, Ireland’s sovereign spreads widened significantly amid doubts about the validity of burden sharing,” Nolan notes.

In contrast to the day before, however, investors were happy to overlook sovereign debt problems and focus on earnings and economic releases.

The earnings season has so far proved to be a strong one, with companies that beat expectations easily outnumbering those that missed.

The trend continued today, with oil majors Royal Dutch Shell and Exxon Mobil gaining from higher oil prices. France Telecom, Potash Corp, Visa and Dow Chemical were among the other companies to beat consensus estimates.

In an otherwise quiet day for economic releases US initial jobless claims were always likely to stand out. The figures
dropped by 21,000 to 434,000, their lowest level in three months,

“The data surpassed expectations and helped markets rally in the afternoon. But the gains were modest, with investors no doubt wary of the news heavy days lying ahead,” Gavan Nolan at Markit concludes.

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Filed under International Econnomic Politics