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Betting On The FED

European credit indices comfortably outperformed their equity counterparts, Monday, in a session where volumes were diminished by the Columbus Day holiday in the US. Spreads continued to feel downward pressure amid expectations that the next stage of quantitative easing is close to a formality, according to Markit Financial Information.

“The Greek bailout was unpopular with the prudent German public, and Chancellor Angela Merkel would probably be wary of granting Greece any more leeway.”

Gavan Nolan

“An unsatisfactory outcome from the weekend IMF meeting had little impact on spreads. China categorically rejected criticisms of its exchange rate policy, instead highlighting the loose monetary policy of the US. But the prospect of a currency war and beggar-thy-neighbour policies has less resonance with investors than the FED’s liquidity pump, though this may well change if the rhetoric becomes more aggressive.” vice president Gavan Nolan at Markit Credit Research writes in his daily alert.

A weaker than forecast non-farm payrolls report on Friday – not normally a catalyst for spread tightening – only served to firm up the consensus that the Federal Reserve will further expand its balance sheet before the end of the year.

The IMF was also at the centre of the main notable movement today.

Dominique Strauss-Kahn, the IMF managing director, says that the agency might be willing to extend its bailout loans to Greece beyond 2013.

Germany quickly issued a statement that made it quite clear that they would be unhappy with such an extension.

“The Greek bailout was unpopular with the prudent German public, and Chancellor Angela Merkel would probably be wary of granting Greece any more leeway,” Nolan notes.

Nonetheless, the news caused Greece’s spreads to tighten significantly and the sovereign market performed strongly throughout most of the day.

  • Markit iTraxxEurope 97.75bp (-4), Markit iTraxx Crossover 454bp (-15)
  • Markit iTraxx SovX Western Europe 141.5bp (-4.5)
  • Markit iTraxx Senior Financials 119bp (-4.5)
  • • Sovereigns – Greece 695bp (-25), Spain 208bp (-9), Portugal 383bp (-13), Italy 177bp (-7), Ireland 425bp (-5), Belgium 123bp (-1)
  • BP 141bp (-1)

TRADING HIGHLIGHTS:

Name Sector Volume Turnover €
NYSE EURONEXT Financials 134,000 2,767,803
STHREE Industrials 306,519 1,082,256
LONDON MINING PLC Basic Materials 160,995 600,862
MUNTERS Industrials 72,709 594,258
NOVAE GROUP Financials 109,369 434,557
REPOWER SYSTEMS Industrials 3,009 352,655
TOM TAILOR HOLDING Consumer Goods 24,350 339,454
CARL ZEISS MEDITEC Health Care 26,852 327,594
JUMBO Consumer Goods 60,000 318,000
A.G. BARR Consumer Goods 20,377 278,735

Top 10 ETF

Name Volume Turnover €
DJ STOXX 600 OPTIMISED BANKS SOURCE ETF 1,484,920 105,929,455
DJ STOXX 600 OPTIMISED BASIC RESOURCES SOURCE ETF 128,244 41,939,958
LYXOR INTL ASSET MANAGEMENT ETF EUR MTS7-10Y EUR NPV 209,089 25,894,724
DB X-TRACKERS – DJ STOXX 600 BASIC RESOURCES ETF 236,205 21,739,561
DB X TRACKERS – DJ EURO STOXX 50 ETF 683,510 19,329,663
DB X TRACKERS – MSCI EMERGING MARKET TRN INDEX ETF 621,630 18,367,500
DJ STOXX 600 OPTIMISED INDUSTRIAL GOODS & SERVICES SOURCE ETF 151,966 16,723,243
DB X-TRACKERS ETF DJES50 1C EUR NPV 500,000 14,965,000
DB X-TRACKERS II ITRAXX CROSSOVER 5-YR TOTAL RETURN INDEX ETF 104,567 12,241,136
DJ STOXX 600 OPTIMISED CONSTRUCTION & MATERIALS SOURCE ETF 62,001 9,855,144

Top 10 Trades

Name Sector Volume Turnover €
BBVA Financials 30,000,000 298,198,786
BANCO SANTANDER Financials 10,000,000 94,300,003
GECINA Financials 1,000,000 86,000,000
BAYER Basic Materials 627,772 33,410,027
UMICORE Basic Materials 1,000,000 33,410,000
BANCO POPULAR ESPANOL Financials 6,500,000 30,225,001
SNAM RETE GAS Oil & Gas 5,461,000 20,383,183
DEUTSCHE TELEKOM Telecoms 2,000,000 19,827,999
DEUTSCHE POST Industrials 1,500,000 19,755,000
NOKIA Technology 2,500,000 19,400,001

Major Movers

Name Sector Volume Volume (T-1) % Change
BBVA Financials 70,895,504 4,217,845 1581%
BANCO POPULAR ESPANOL Financials 13,864,888 1,397,678 892%
INFINEON TECHNOLOGY Technology 8,062,722 1,363,419 491%
TELECOM ITALIA Telecoms 22,312,682 7,974,433 180%
HIKMA PHARMACEUTICALS Health Care 3,769,365 1,350,926 179%
DEUTSCHE TELEKOM Telecoms 9,896,973 4,574,373 116%
DEUTSCHE POST Industrials 5,059,129 2,665,023 90%
BT Telecoms 6,625,224 3,844,888 72%
ITV Consumer Services 14,370,746 9,156,002 57%
SNAM RETE GAS Oil & Gas 31,393,314 21,017,338 49%
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Welcome To The Euro, Estonia! Here's Your 4,5% Extra Risk Premium

As some might have noticed, the euro zone – also known as EZ16 – has now become EZ17. It happened last week, as Estonia officially joined the European disaster zone. And the financial markets gave their official approval this week by kicking the price on Estonian CDS’ up by 4,45%. The Baltic Euro newbee moves straight in among the Top 8 countries with the highest risk of default.

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table.”

Simon Tilford

The funniest thing is that the first, and almost the only, newspaper outside the Baltic region  reporting the historical event was The New York Times; on Thursday June 17th the representatives of the 27 European countries hailed the sound economic and financial policies that had been achieved by Estonia in recent years, and signed the paper that authorize Estonia to shift from the kroon to the euro on January 1th 2011.

For the leaders of the bloc, expanding the euro zone to 17 nations is tantamount to a show of confidence at an inauspicious time for the battered euro, which has lost about 13 percent of its value against the dollar since the beginning of the year, James Kanter writes in the NYT,

With a debt crisis that appears to be spreading from Greece to Spain, membership for the country, Estonia, might seem more like a curse than a blessing.

There has been speculations about the countries might change its mind and abandon the single currency, and some have doubts that Estonia is even ready for the move.

“Maintaining low inflation rates in Estonia will be very challenging,” the European Central Bank warned last month.

Still, the euro remains among the strongest currencies in the world, and membership opens the door to a club with global influence.

For small and unsure countries on the fringes of the European Union, it doesn’t get much better than this – no matter the mounting downsides for countries already on the inside.

Political Prestige

Estonia becomes the third ex-Communist state to make the switch to the euro, after Slovenia and Slovakia, and the first former Soviet republic to do so.

Membership is also an important signpost that a country is on the way to achieving Western European standards of living, an important goal for a former Soviet republic like Estonia that has long been eager to develop.

“It’s a great day for Estonia,” Andrus Ansip, the Estonian prime minister, told Latvian state radio in an interview.

“We prefer to be inside, to join the club, to be among decision makers.”

And Estonia’s central bank governor, Andres Lipstok, will now be able to take a seat on the European Central Bank’s powerful council that sets interest rates.

Sheer Bloody-Mindedness

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table,” says Simon Tilford, chief economist for the Center for European Reform, a research organization based in London.

“But you also could call it sheer bloody-mindedness of Estonia to join now with the outlook for the currency so uncertain,” Tilford says according to NYT.

With a total output of about $17 billion, the Estonian economy is tiny.

It’s placed as the sixth poorest country among the (now) 28 EU nations.

Public debt in Estonia is currently estimated at an annual 7.2% of GDP –  a tiny deficit compared to most other countries in the bloc.

And right now it looks like the Estonian government will be able to keep its pledge to the euro.

But note; it looks like it.

According To Schedule

Just two days before the deal was to be sign in Brussels, the Estonian Ministry of Finance published it’s budget figures for the first five months of 2010.

The Ministry of Finance estimated that the Government sector budget deficit by the end of April was 5.1 billion kroons,  or 2.39% of the projected GDP of the year 2010, theBalticCource.com reports, quoting LETA/Postimees Online.

In five months of 2010 the State budget collected 32.5 billion kroons in revenue while the expenses amounted to 34.6 billion kroons.

The biggest State budget spending in five months are mainly social benefits – 15.3 billion kroons.

2.4 billion kroons were spent on investments. The payments on investments in the first few months of the year were by 10% higher than in the past couple of years due to improvements in the use of foreign aid.

Estonia’s operating expenses in total as well as the human resources spending have fallen, the Ministry of Finance says. And the State’s benefits paid to individuals, the private sector and to other Government authorities are on the same level as last year.

Now – compare that with the projections charted below:

The Estonian unemployment rate has increased by more than 150% between September 30th 2009 and February 19th 2010, to 14,3%, according to Index Mundi.

In addition, the Estonian credit agency, Krediidiinfo, estimates that the number of companies that will go bankrupt this year could amount to 1,700, especially in the construction business, accommodation business and catering business.

That’s up by 700, compared with the 1000 bankruptcies in 2009.

Just to put the topping on the cake; Estonian overdue loans rose in May to the highest level since at least 2008 as troubles in the commercial property industry outweighed improvements in mortgage asset quality, Bloomberg reports.

The share of loans overdue for more than 60 days rose to 7 percent of total credit issued to companies and individuals, compared with 6.7 percent in April, central bank says, according to the balticbusinessnews.com.

According To Schedule?

In For A Shock?

For the first time in many years, the average wages in Estonia fell (about 5%) in 2009.

Kalev Petti, head of research at Faktum & Ariko, says that othewise optimistic Estonians may become more pessimistic in January 2011 when Estonia adopts the euro.

“When the euro arrives, people and especially older population, will understand how poor they are.”

Petti says that while there were few other factors that are increasing pessimism among the older generation, it must be their feeling about the upcoming euro adoption and fear of prices continuing to rise. Pensioners are uneasy about the euro and the actual transition may cause psychological depression for many, the balticbusinessnews.com writes.

I guess the following statement made by Estonia’s prime minister, Andrus Ansip, in a radio interview will not help the situation:

“Our banknotes are more beautiful than euro banknotes.”

According to economists, the preparation to join the euro zone created some disadvantages for Estonia compared with neighboring countries, which enjoy a relative larger degree of flexibility by hanging on longer to their legacy currencies.

Wrong Place – Wrong Time

But that seems to be very, very short-term advantages.

Since last week the price of insuring the Estonian Medium Term Loans has jumped 4,45%, and the spread compared to German CDS’ has widened to nearly 8%.

The price on Estonian Sovereign CDS is now 113,01 basis points. That makes the insurance of Estonian government debt the sixth most expensive in Europe.

Source: Zero Hedge

Still, it a long way to go reach the Greek level that soared to nearly 1.000 basis points today.

Estonia is also an export-driven economy that quickly could be overshadowed by financial difficulties, particularly if the euro zone remains unstable, and neighboring countries like Poland and its Baltic neighbors insist on hanging on to their currencies.

“Investors will only be willing to lend to Estonia on favorable terms if Estonia can continue to compete,” Mr. Tilford, the London economist, says.

“That is where the biggest risks for Estonia now lie.”

Tallin In Trouble

And as all of the above is not enough; the Estonian capital – Tallin – is set to become the European Culture Capital in 2011.

But now, it turns out, that the city may lose 23.5 million kroon granted by the European Union because it has failed to provide Brussels guarantees for financing the culture capital programme, ERR reports, according to balticbusinessnews.com.

The so-called Mercour prize in the amout of 23.5 million kroons, a direct EU grant, has already been included in this year’s budget revenues of the city, but right now that payment is doubtful.

According to Brussels, if Tallinn wants to secure the funds it needs to submit guarantees by 28 June at the latest when Tallinn is visited by Sir Bob Scott, chairman of the assessment committee.

This is unlikely to happen since the government has not plans to issue any such guarantees before September.

Estonian Minister Laine Jänes, on the other hand, claims that the commission has been informed of such circumstances.

Welcome to the euro disaster zone, Estonia.

And good luck!

Related by the Econotwist:

Estonia: Banks Lost USD 23 million in Q1

Estonia: Something Doesn’t Seem Right

Estonian Newspapers Protesting With Blank Front Page

Businessman To Declare Hunger Strike If Not Paid

An Estonian Mystery

Swedbank Buy Greek Bonds With Estonian Money

Estonia Put Pressure On Journalists

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Goldman Sachs: Good Morning Europe!

Goldman Sachs seem to have found a new wonder-boy, and perhaps a heir to chief economist Jan Hatzius, in its new Europe analyst Erik Nielsen. At least he got style, a sense  of humor and is just as crazy about soccer as most Europeans. He also show some profound insight on the diversified European economy. Here’s Mr. Nielsen’s thoughts on Europe on a fine Saturday evening in Chiswick.

“With no particular reference to Denmark’s fine victory this evening, I am just wondering what European football would look like had it not been for the smaller countries.”

Erik F. Nielsen


“With no particular reference to Denmark’s fine victory this evening, I am just wondering what European football would look like had it not been for the smaller countries – be it Denmark, the Netherlands, Switzerland, or Serbia … Its certainly difficult to see much hope in England, France, Spain or Italy – or in Germany after that last performance.”

Away from football, these are my thoughts on Europe on this fine evening in Chiswick:

We are through another week of good real-economy data releases and (grudgingly) improving markets.

The EFSF has been formally established. Along with the Commission’s and IMF money, I think it’s a serious defence mechanism which ought to help further stabilise markets.

Stress tests for the banking system will be published next month. Good, because that’s what the market demands, but I worry we might be heading into a disappointment because markets might expect testing against extreme tail-end risks considered as absurd by policymakers.

The ECB has now bought €47bn worth of sovereign debt – still peanuts in any reasonable comparison, but I think they may be looking to wind down the purchases once the EFSF is up and running in July.

The IMF spoke this past week on Greece (okay with program); Spain (happy with policy reforms); and France (marginally critical on fiscal – too polite).

G20 meeting this coming week; I wonder if the heat will turn on Germany now that China has announced a re-introduction of some FX flexibility.

We are heading into PMI-week in the Euro-zone; we are looking for slight improvements.

The UK will see the government’s emergency budget on Tuesday; big budget cuts on their way.

The Swiss National Bank will publish its May balance sheet this week confirming their huge FX-interventions.

In Sweden we’ll get the key KI/NIER economic tendency survey on Wednesday. It’s already at its highest level since August 2007, but we remain shamelessly optimistic.

Poland holds presidential elections tomorrow with a likely second round on July 4. Outcome very important for policies.

The central banks in Norway, Hungary and the Czech Republic will all meet this week to consider their interest rates; we expect all three to leave rates unchanged.

The IMF arrives back in Ukraine on Monday for a week’s talk on how to restart the program. We do not expect agreement this week.

Here’s a copy of the detailed analysis, provided by Zero Hedge.

Related by the Econotwist:

DnB NOR Finds Markets Participants EURNOK Expectations “Remarkable”

Global Economy On Fast Track To Disaster

2010 EU Deficit Exceed 7% – Commission Suggest “Cold Showers”

Fitch: Spanish House Prices To Fall Another 20%

Deficit Crisis: Cyprus, Denmark And Finland Join The Watchlist

Pressure On Spain To Cut More

EU Officials Fears Second Depression And War

EU Prepares For Spanish Bailout, Newspaper Says

EU Deficit Increased By14 Billion Euro In First Quarter Of 2010

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