Flows, Market Snapshot and Axes…
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Top of the checklist is the European bank stress test. Results were released late on Friday and were received with a remarkable degree of nonchalance by investors. One is inclined to argue that market movements had not been so quiet in the days leading up to Friday evening as they were on the evening itself. Eight banks out of the ninety tested failed the exam, which is lower than most press reports during the week had predicted.
A further 16 banks passed the test with a core tier-1 capital ratio of only 5% to 6%. Those institutes will be under close scrutiny from supervisory agencies in the coming months. Together with the stress test results, the EBA published masses of balance sheet details from all participating institutes. Some observers fear that these details open the door for speculators to attack any bank that looks weak-ish. #2 on our checklist is the unsolved debt-ceiling issue in the US.
Time is running out. The constitutional debt limit needs to be raised by 2 August, and one should allow about ten days for the implementation of necessary laws. This means we should be prepared for a showdown during next weekend, at the latest. Rating agencies are becoming nervous. Moody’s threatened to lower the US’s Aaa rating. S&P went one step further and watered down its top rating, attaching a “credit watch negative”.
The rating agency noted a 50% chance that the US credit rating will be lowered over the next three months. It is noteworthy that S&P linked its assessment not only to the debt ceiling. Rather, the rating agency requires lawmakers to devise a credible long-term debt reduction strategy in order to keep its AAA rating assessment. Most, if not all market participants, expect the US Congress to find an agreement in the eleventh hour. Consequently, financial markets do not yet behave as if the world’s largest debtor were about to default on its obligations within less than three weeks. #3 on our checklist are various topics related to the EMU debt crisis. The path towards a sustainable solution looks more obscure than ever.
More than thirty different models on how to end the Greek tragedy are being discussed, according to German finance ministry insiders. EU President Van Rompuy asked finance ministers to prepare a Head of States emergency summit on Thursday. Angela Merkel insists she will participate only if the gathering carries a reasonable chance of a definite solution. Private sector participation is no longer a must; public discussion is currently about restructuring models that describe an effective lowering of Greece’s debt burden.
Bond buybacks carried out, or financed, by the EFSF appear to be favored by most decision makers. In the meantime, investors have adopted a more constructive view with regard to Italy. Berlusconi’s austerity package passed parliamentary hurdles.
The country successfully raised short-, medium- and long-term funds in capital markets. Bond spreads tightened from record-wide levels and have more room to come in. On the rating front, Moody’s lowered Ireland to junk (Ba1) while Fitch followed the other two agencies to rate Greece next-to-default (CCC). #4 on our checklist is Fed president Ben Bernanke and his flirt with a quantitative easing three (QE3) program. Similar to last year’s wording preceding the implementation of QE2, Bernanke stated that the Fed has some options should the economic outlook deteriorate. At the same time, however, Bernenke stressed that he does not expect economic conditions to worsen, but rather to improve in the second half. Nevertheless, pandora’s box is open and QE3 becomes more likely the longer the labor market is ailing.
Checklist item #5 refers to quarterly earnings. JPM, Citi and Google delivered exciting results last week. More than a hundred S&P500 companies are scheduled to release their intermediate results this week. #6 and the final topic on our checklist, are ordinary macro data. In this regard, this week’s focus will be concentrated on EMU business sentiment indicators: PMIs on Thursday, Ifo & INSEE on Friday and the professional investors survey ZEW on Tuesday. Generally speaking, we expect a moderate weakening in all indicators albeit at still relatively expansionary levels. Looking at all items on our checklist, it is impossible to anticipate anything that goes beyond “elevated volatility” in all asset classes.
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