ECB and the stock markets
The story I told on Monday appears to be
gaining momentum. ECB announced new measures on 7 December and now the stock
markets have finally picked it up. The combination of unlimited loans from the
ECB and a “guarantee” from EU on government bonds has caused a stampede into
short European short-term bonds, including those issued by Spain and Italy.
This is indeed very helpful in covering
the short term financing needs of the European countries. And it gives the
banks a healthy yield pickup, giving them a stealth, tax-payer financed
contribution towards rebuilding their capital base. Wednesday’s opening of the
ECB facility will give an important pointer. If the banks take upwards of EUR
250bn, it will be deemed a success and the current Santa rally can continue.
Downwards of EUR 100bn will be interpreted as a failure.
I have for some time held the conviction
that everything we know about pricing of risk is off the table for the moment.
Except of course that bonds with a guarantee should trade at a lower yield than
those without a “guarantee”. Go figure.
It is interesting that nobody really noticed ECB’s new initiatives when they were introduced. Instead markets took a great interest in guessing about the imminent Euro-zone breakup.
It is interesting that nobody really noticed ECB’s new initiatives when they were introduced. Instead markets took a great interest in guessing about the imminent Euro-zone breakup.
But heed this warning: If – and it is
still a big IF – this re-evaluation of the risk situation continues to gain
momentum, we are likely to see a major setback in the two kinds of assets that
are the most overvalued or overbought or whatever: US T-bonds and German Bunds.
While gains in the stock market may be fun
to look at, the sheer volume of the bond holdings of this world means that you
should not take the eye off that ball.
Stocks are for show, but bonds are for
dough – as we say on the golf course.
Positive data
Stock markets were helped by positive
economic data. German business sentiment data came in strong and a report confirmed
that the US construction sector is improving. Last week a rather dubious labour
market report also told that the US economy is beginning to add jobs.
That the US economy continues to surprise
to the upside is fully in line with Origo’s view that a rebound was due in Q4.
The German data are not entirely in line with our rather gloomy view on the
European situation. However, in all fairness, we are beginning to see
indications that the downturn in Europe may be losing momentum.
US Banks
Somebody stole the punch bowl right under
the nose of the US banks, just as a rally in bank stocks was about to take off
yesterday. Rumours had it that even the US regulators are serious about
demanding higher capital ratios.
Did this really come as a surprise to the
markets?? Did market participants really believe that the influence of the
banking sector on the politicians is so strong that the US banking sector could
avoid completely sensible regulation when the rest of the world is moving that
direction.
After 25 years in this business I can
still get surprised at the sheer ignorance and credulity of many market
participants.
Oil glut. WTF?
Yesterday’s
Financial Times carried a
story that began with the words “The boom in North American oil production has
triggered a race to expand the US’s main oil storage centre, raising concerns
among some industry executives of potential glut in capacity”.
Please read it again. It tells that there
is a boom in oil production in North America. A couple of years ago an
estimated 8bn barrels were found deep under the Mexican Gulf. Shale oil reserves in
Colorado and other US states may match the reserves in OPEC. Is this the end of
the story of the earth running out of oil.
Maybe oil does not come from dead algae, ferns,
and dinosaurs. Maybe oil is formed deep in the mantle of the earth and slowly
seeping towards the surface. At least that is a story worth following.
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