The main story for the next two days will be Japanese Prime Minister Abe’s visit to the U.S. to meet with President Trump. Abe is coming to mend relations after Trump officially ended the Trans Pacific Partnership (TPP) agreement before Congress could even debate the trade treaty. The Japanese prime minister had expended a great deal of political capital in Japan to get various parties to accept a massive Pacific-based trade agreement. In an effort to forestall any discussion of Japan as a currency manipulator, the Japanese are offering all sorts of investment ideas in the context of getting Trump the negotiator to soften his stance on tariffs for Japanese goods, or sourced material from Asia for assembly in the U.S. Japan is a paramount promoter of the global supply chain paradigm.
Archive for the ‘Greece’ Category
One of the most important indicators for financial markets is yield curves. They are predictive as they have historically shown coming economic turmoil, or, more importantly, the end of a business cycle. The severity of any recession depends on the amount of debt that has preceded the onset of an economic slowdown. I will remind readers that before the 2007-08 financial crisis, the U.S. 2/10 curve actually INVERTED to NEGATIVE SIX BASIS POINTS. Some financial pundits like to cynically advise consumers that the STOCK markets have predicted 10 of the last 5 recessions, but that is not so with yield curves. The difficulty with the signalling mechanism of yield curves is predicting the time for even during the GREAT RECESSION equity markets continued to rally even as the curve flattened.
And so it goes. As the light lifts off the European “bailout” it appears that most analysts agree that the “Agreement” was a lose-lose for the European Project. The Germans stood firm and placed unduly harsh demands upon the Greek electorate that had the temerity to openly reject the terms of debt resolution. Merkel had favored a real compromise until Alexis Tspiras deployed the nuclear option and went to referendum in an effort to better be able to negotiate with an intransigent Djisselbloehm and his ECOFIN council of Grand Inquisitors (see the Brothers Karamazov). The punishment meted out to the Greek nation is a loss for them but ultimately the real loss will be on Spain, Italy, and, of course France. The Germans have revealed that the use of Berlin’s money to support the EU is going to come at a price and it is the acceptance of an economic model for Europe that is German, its backdrop of course being sound money. Not the strong dollar mantra of the U.S. Treasury Secretary but an actual strong currency, at least until the German financial system enters a fragile state.
Earlier I was rereading a blog post from almost three years ago. I believe it still has great relevancy and gives us all perspective from where we have been to what the next three years may bring. Perspective for a global macro trader is very important for without it traders rush in where investors dare to tread.
As discussed ad nauseam, politics is trumping the economics of the Greek drama as the European finance ministers are trying to cut and paste a “bailout” solution that satisfies all parties. In what is being reported as terse discussions taking place in Brussels, the Financial Times reported that German Chancellor Merkel said, “There’s not going to be an agreement at any cost.” This Merkel comment is in direct contravention to Mario Draghi’s famous pledge in July 2012, “Whatever It Take” and no taboos.
It would be great to concentrate on market fundamentals rather than the latest TWEET but as traders know, can’t play the cards that are not dealt. If the market wants to jump to the latest 140 character piece of informed opinion, then it is either use your own reaction function or fold up the lap-top and wait for greater clearance from trends and underlying fundamentals. The markets are presently in a binary mode. Chinese stock market gyrations impact global equity markets and all type of commodities and foreign currencies as traders “guess” what assets the Chinese might be selling to raise cash to meet stock market losses. The nature of a “collateralized, securitized” credit system is that it is subject to violent reactions because of its pro-cyclical element: Copper secures a loan and when copper prices rise the lender offers more money because the value of the security increases allowing an increase in liquidity.
The outcome of the Greek referendum surprised all, even those who believed a NO vote was imminent. As NOTES has written ad nauseam, the referendum card was the nuclear option for Prime Minister Tsipras and he played it for a resounding impact. Chancellor Merkel was furious with Tsipras for having the audacity to challenge the EU elite by going to the people and testing the concept of the general will. The financial media and its purveyors of pabulum could only see this move by the Greeks in its impact upon the equity markets–and marginally the global bond markets. The outcome for the debt markets is a mixed bag for some bonds rally while the debt of smaller peripheral economies take a hit as the risk-off trade is initiated to the possible negative fallout from the lopsided Greek vote of NO.
Six months ago the world woke up to learn that the Syriza Party had been elected in Greece. It was a dream for some and a nightmare for the European ruling elite. Yes, there is a ruling elite that is very similar to what C. Wright Mills wrote about America in the 1950s. This is not conspiratorial but rather a sociological commentary and the ruling elite is not beholden to an electorate but operates with a sense of noblesse oblige. The Brussels eurocrats are in the image of Plato’s Philospher King, only there are too many Kings all believing themselves to be the most capable ruler. For two years I have written about that the European leaders feared REFERENDA more than anything for direct democracy was an affront to the wisdom of the self-anointed elite. The European project was too important to be left to the capricious voters.
***NOTE: On late Friday, Greek Prime Minister Alexis Tsipras announced on Friday that the Greek people will be voting on the latest aid proposals on Sunday, July 5, saying he would advocate a “no” vote. The ECB has frozen any further emergency liquidity assistance (ELA) to the Greek banks. As a result, Greece has imposed capital controls and the banks will remain shut on Monday. (Also, the euro is already down 1.7% to 1.1014 as trading opens in Asia.) Given the drama unfolding, I’m reissuing a post from February 4, where I discussed the new Greek ruling party and what it would mean for the Troika, Greek relationship.
Be prepared for further statements from Europe’s elites, especially Mario Draghi, who has pledged to do whatever it takes to preserve the euro.
It is difficult for the global markets to maintain a continued concentration on the fallout from the Greek credit crisis. The markets have spent five years trying to discern what the impact will be from either a default and the Greeks leaving the Euro and thus the EU. The last few days of trading has to make the European authorities nervous as the rising specter of the Greeks actually pushing the exit button becomes a genuine possibility. (Or at least the Greeks want to impress upon their creditors that it is a tactic they are not afraid to utilize.) The fear of a country actually choosing to EXIT has led to yields on Italy, Spain, Portugal and Ireland to rise dramatically. The 2/10 yield curves have steepened as investors are lightening up on the peripheral nation bonds. (The ECB seems to have been sidelined for the last few days as the bank preserves its capital for possible more volatile situation.)