Thursday, April 29, 2010
OK, here's what we learned yesterday:
* The Fed is nowhere near putting rates up or, evidently, moving towards asset sales
* RBNZ tightening will be fairly modest
* Brazil's central bank is taking the more aggressive route, as they hiked by 75 bp yesterday
* The Grim Reaper at S&P has now scored a hat-trick, as Spain was downgraded (following on from similar moves in Greece and Portugal)
*Oh, and there's an agreement in principle between Europe and the IMF to stump up €100 - €200 bio for Greece over a thee year period, thereby obviating the need for the Hellenic Republic to come to market over that period.
€100 -€200 billion over three years. That is a LOT of money. The good news, of course, is that if such funds were actually delivered, Greece should effectively disappear from radar screens...especially as the Europeans seem committed to avoiding bondholder haircuts.
The bad news, of course, is that €100 - €200 billion is a lot of money...and someone's gonna have to stump it up. Needless to say, the IMF's portion would blow away by many multiples Greece's quota, necessitating further contributions from the Fund's members. While the BRICs might be content to contribute, thereby accessing more SDR bonds, it's not altogether clear how well writing a big check will play in fiscally-challenged countries like the US and UK.
Moreover, the Europeans themselves will be adding to their own aggregate fiscal borrowing, as that kind of dough doesn't grow on trees. They had best hope that this package deflects sovereign risk fears more or less permanently....for what would happen if similar or greater amounts were required to rescue other PIIGS?
A back of the envelope calculation suggests that German and French banks each have €300 -€350 billion worth of exposure to Greece, Portugal, and Spain. That's yet another reason to hope that this package succeeds.
Yesterday Macro Man suggested that the equity trade was better than the currency trade. Here's an example of why. Financials make up some 30% of the Eurostoxx 50 (versus roughly 17% of the S&P 500.) Among the top 13 stocks in the European index include luminaries such as Banco Santander, BBVA, and Unicredito. As you can see, the market projection of 2011 dividends has eased off recently, and remains well below the early January highs.
Small wonder, then, that the S&P has outperformed the Eurostoxx by a fairly dramatic margin. (The chart below shows the price ratio between the SPX and SX5E.) This is the shape of line one would expect to see in a European meltdown scenario, not the meandering path taken by EUR/USD shown yesterday.
If (and it's a big if) you think that the European rescue package will prove to be a panacea, then this will prove to be a wonderful opportunity to take the other side of the trend. If you remain sceptical, however, that taking the other side of any temporary outperformance of European equities would be richly rewarded.