Notes From Underground: Greece shakes; Spain rattles; and German Government threatens to Roll

Get the air sick bags as we are back in Europe and it truly is ad nauseam. The equity markets were poised for risk when mid-day news caused the S&Ps to lose its early gains. The markets started to lose its nerve when rumors started swirling that Spain would have to go to the European Funding mechanism. Then Moody’s downgraded Greece’s debt rating four notches to junk status.

Boy, those analysts really are beneficial–they’re similar to a fire department that arrives after the house has burned down. The only good thing we can say about Moody’s is that they did it on a Monday rather than on a Friday prior to Memorial Day. The markets were able to weigh the downgrade in a reasonable fashion and though the market closed far from its highs, the tumult did not result in a market collapse. We advised our readers yesterday that the 200-day moving averages would provide heavy resistance to the equity markets, as did many other commentators. The financial markets have a great deal of work to do to entice the investors with ready capital back to stocks. A rally that sustains itself above the long-term averages may well be the tonic, but the healing will not be accomplished overnight.

Spain denied rumors that its banks were having funding problems but the spread between Spanish/German 10-year sovereign debt widened out to more than 200 basis points. Understand that the 10-year BUND is yielding a miserly 250 basis points so the Spanish are not suffering Greek-like penalties as of yet. The BUND continues to rally for it is the best DEBT instrument to own in the European collateralized lending markets. Also, with the Germans announcing a new four year austerity plan, German financial responsibility has its rewards. There were rumors out of Germany that Frau Merkel’s coalition was under severe stress as the opposition was calling for it to fall. The ultimate test for the CDU/FDP will come on June 30 in the presidential elections. Although the German presidency is largely a ceremonial position, it will be of paramount importance fro Merkel to get her choice, Christian Wulff, elected. A loss would not be fatal as Merkel will not lose the parliament, but it would place her on shaky popular ground and with several Constitutional challenges underway to the Greek “bailout,” Merkel’s authority would be under pressure from many directions.

Her government is scheduled until 2013, but with a crisis underway and on the boil, the popular mood could provide the need for an earlier vote similar to the gambit played by Gerhard Schroeder. Tonight, there was actually some good news for Europe as it seems as if Chinese sovereign wealth funds are preparing to invest in Greek projects from shipping to tourism. We remind our readers that it was the Chinese decision to not purchase €25 billion of Greek bonds that began the rapid rise in Greek CDS and brought the European debt crisis front and center. The Chinese know get to invest and the Euro has dropped 15 percent in value–not bad for those nascent capitalists. Hmmm … maybe Europe has just been Shanghaied and you wonder why 2+2=5.

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One Response to “Notes From Underground: Greece shakes; Spain rattles; and German Government threatens to Roll”

  1. Danny Says:

    Like you and several other people have mentioned…you don’t solve a debt problem with more debt thus it is no wonder the Chinese wouldn’t buy Greek debt. If the Chinese invest money into shipping, tourism, etc. it might be lead to proper maintenance of historical areas as well as new value adding projects in their ports which could help offset a more austere budget. This sort of investment seems much better for both sides in comparison to the impact of somewhat lower interest rate short term debt which is little more than a pain killer cocktail believed to cure cancer.

    In other news…The CME has raised margin requirements on crude oil.
    http://online.wsj.com/article/BT-CO-20110510-702290.html

    Per the conversation the other day it will be interesting to see what if any fallout there will be from this move by the exchange – perhaps it won’t be the last margin requirement hike. I did spend a little time thinking about the impact of ETF’s on commodity markets and a focal point of my thoughts were on the short selling ETF’s. I am wondering if there is a difference between the way shorts in the commodity contracts vs. shorts on the ETF impact the market such that since the introduction of commodity ETF’s the underlying commodities became out of balance between buying pressures and selling pressures.

    Danny

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