Weekly Commentary on Financial Markets: 20-24 June 2011

Weekly Commentary on Financial Markets: 20-24 June 2011

by Jacob H Schmidt

Another eventful week, with global macro themes dominating again the markets:

Greece continues to be in the headlines, with both the Greek parliament and the European Union in the driving seat. While the government survived the vote of confidence on Tuesday and the EU voted on a package in principle on Thursday the developments seem to get out of hand. Latest news from an opinion poll in Greece shows that 2/3 of all Greeks reject the austerity program. On the other side Northern European countries increasingly voice their frustration with the Greek and other Southern European problems. Is Greece still a liquidity issue or a solvency problem? The market’s answer is clear: Greek 5 Y CDS at 19.55%. Default probability of > 50% indicates that it is only a question of time when Greece will default. Fundamentals and absolute level of debt suggest heavy haircut / debt forgiveness. Last but not least more commentators, politicians and bankers discuss a Greek default as unavoidable. The EU politicians and ECB are still rejecting any default / restructuring / hair cut solutions. It seems to us that it is too late, the Greek debt crisis will roll on, inevitably. We believe in the following sequence of events: further political turmoil in Greece, followed by desperate attempts to a compromise, followed by the EU and IMF handing out some money in July, hence avoiding a default for now, but a default likely later in the year or next year. Greece will find leaving the EURO more attractive than staying in. Greece’s developments are textbook style, 1980s LATAM. Many market participants fear that this could be bigger than the 2008 Lehman crisis.

The second main development was the FED’s rate decision on Wednesday to leave US rates unchanged for an extended period of time, Ben Bernanke’s press conference and his mixed signals regarding a QE 3. The impasse on the US debt ceiling caught the markets’ attention for a short period before switching back to Greece. Bill Gross of PIMCO believes in a QE3. Expect low US interests rates for much longer.

More accusations of speculation and manipulation in the commodity markets. President Sarkozy likened commodity speculators to mafia, a view which was confirmed in interviews by other French officials.  The release of oil from strategic petroleum reserves (SPR) shocked the commodity markets, WTI plunging 4 USD before bouncing back. It seems that the US and other governments wish to bring commodity prices down to get inflation under control. Some call the SPR release the new QE. We believe that we will see more interventions by governments to curb demand, investment and speculation in commodities.  

Outlook:

Light volumes in stocks with heightened uncertainty about the future of the Southern periphery as well as further stimulus.  Greece like a Damocles sword over the markets, traders and investors buying on dips, but also quick profit taking. Any deal (US, Greece) can / will lead to sharp rallies, which might be short lived. Hedged exposure preferable, via top hedge funds, HFoF or DIY. Increased chance of systematic and political risks.

Conclusion: As I wrote last week: Politicians seem to underestimate the serious state of the markets and the Greece situation. And it might already be too late. European leaders need to act now to avert a repeat of Lehman 2008. The issue is no longer Greece, but the EURO, Europe, the stability of the markets.

Jacob H Schmidt
CEO, Schmidt Research Partners Ltd
Director, SFP-International Ltd.
Adj. Professor, Derivatives and Investments, Webster University London
36 Seymour Street, London W1H 7JF, UK
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jschmidt@schmidt-research.com
jschmidt@sfp-international.com
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