Sunday, 19 June 2011

Weekly Commentary on Financial Markets: 13-17 June 2011 by Jacob H Schmidt

Weekly Commentary on Financial Markets: 13-17 June 2011
by Jacob H Schmidt

This week was dominated by global events again:

The downgrade of Greece by S&P to the LOWEST rating of any country drove financial markets further down, to be reversed somewhat at the end of the week. The peripherals Portugal and Ireland continue to be under stress and the risk of contagion to Spain and Italy is on the cards. Due to the inaction on the national level of EU member states as well as the European level, markets feel further pressure from the uncertainty around the outlook for Greece, a potential restructuring and the fate of the EURO itself. Too many dissenting views from German and other European politicians and aggressive forecasts of the EURO’s future – see Nouriel Rubini in this week’s FT) are very damaging. Lack of certainty – risk of a repeat of the 2008 Lehman mistake.
In the US the July deadline for debt ceiling on US government debt is approaching fast. China appears to take on a bigger role in the bail out of Greece. After 150 years of the UK as a world power, 50+ years of the USA, China is now emerging not only as a richer, but also more influential player, perhaps taking over America’s role. I believe that the Greece problem will continue to drag on with bridge loans and short term fixes rather than strategic decisions. Further EU expansion becomes very unlikely.

Markets are concerned about a “messy” Greek default and resulting casualties in the banking sector as well as contagion. Any indication of a fix (short term or – less likely long term, strategic) will lift equity markets. Investors find a lot of good companies, but should avoid any of the recent social media IPOs and the potential Facebook IPO rumoured to be valued at around USD 100 b!

A summer rally in US and European equities are very likely.

Bond Markets continue to be dislocated. What is worse: Greece trading at 30% (2years), 20% (5 Y CDS) and 18% (10 year)) or US Treasuries at artificially low yields (0.37% for 2 years, 1.52% for 5 years or 2.94% for 10 years?
The Greek tragedy reminds me of the messy 1980s LATAM and 1990s CEE defaults, the prolonged restructuring talks and finally, after a long search for a solution, the Brady plan. Politicians seem to underestimate the severity and the duration of such a scenario.

Commodities – precious metals – could again become safety assets for many investors.

Conclusion: European leaders need to act now to avert a repeat of Lehman 2008. The USA’s brinkmanship will be the next big issue, during the summer. Investors should expect more volatility.

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