Bearish macro news coming in on a daily basis now.
The European Commission revising its Eurozone growth downwards , expecting it to contract by 1.9% in 2009(and the revision was most likely too conservative anyway with some bank analysts expecting 2.5% contraction), while the ECB is still mulling inflation risks. ECB projections has simply put been unrealistic.
Unfortunately, the ECB just dont seem get what the game in town is at the moment and this will come at a price. The price will be a continued falling Euro. (This might suit the ECB as well as it takes care of some of the lacking monetary easing).
The Jpy is to remain strong as currency hedging flows gets incentivised by globally steeper yield curves, kickstarting Japanese foreign asset hedging programs.
As Japans fiscal year end approaches, there is an increased probability that we will see accelerated repatriation flows back to Japan, as there has been a 40% drop in the net assets of publicly offered stock investment trusts in Japan. This will be a main driver of the repatriation wave.
Japanese currency hedging of foreign assets should be very much emphasised vs the Euro as Japanese lifers currency hedge their Eur exposures due to the Eurozone yield curve steepening towards the "magic" 200 BP mark.
The ECB mistakes will also increase the risk for a prolonged recession in Europe as layoffs and company closures becomes exaggerated compared to an environment of proactive monetary and fiscal measures. Add to that the Germans and their fiscally conservative approach, with the German Finance Ministry ruling out further assistance to the financial sector despite the economy on a steep downward slope, implying real growth differentials will work against the Euro as well. I can hear the French politicians screaming for a weaker currency already,,,,,,
The S&P;s downgrade of PIGS countries,(although expected), removing the AAA status will push official accounts to unwind government debt positions, driving the cost of borrowing higher in these countries. S&P also pointed out that the PIGS countries has to improve their competitiveness and productivity.
Well, thank you very much, Latvia is trying already,,,,, and it wont work there either. With the PIGS countries anchored up to the Euro, and the Euro still overvalued, it will be easier said than done - mission impossible til the Euro slumps anyway. Latvia will soon get out of their cryptonite deflationary pressure cooker, but it will be easier for them than for the PIGS.
The EMU spread divergence is continuing and in the short term it should mean that the Euro area as a basket of credit exposures should become less appealing, affecting investment flows negatively. The vision of the Euro as the "new reserve currency of the world" is quickly fading away.
The European commission also slashed growth forecasts for the CEE countries with three certain Baltic states and Hungary forecast to go into recession. Not long ago, ECB members and European politicians were talking about the CEE remaining an area of growth, hoping it would bailout the Eurozone.
Those hopes are now gone. The CEE area had been a perticularly fast growing destination for Eurozone exports . This is now withering quickly. According to the EC;s forecast, Poland´s fiscal deficit will not pass the Maastrich criteria and would negate entry to ERM2 entry in 2009. Expect the CEE (and other emerging countries) to all join the path of the western world yieldcurves as they come to the conclusion that it is a nobrainer to sacrifice their currency and inflation, funding concerns, before domestic demand.
Hey, theres always the IMF - or? Think they´d better hurry. IMF may want to portray themselves as having access to unlimited funds, but the countries willing to lend out the cash are getting fewer by the day as they have their own holes to put it in, it seems.
Competitive devaluations are around the corner, and with the CEE countries joining in as well, this will add another stone to the Eurozone´s burden.
The unfolding of the CEE countries will have a negative effect on the Eurozone via trade and the European banking sector, since many European banks are heavily exposed towards the CEE countries. Coincidently, in FT today, there was an article with European banks asking for crisis funds to the CEE countries and beyond.
The banks behind the petition were; Raiffeisen International, KBC, Unicredit, Intesa San Paolo, Erste Bank, Société Générale, German Bayern Landesbank, Swedbank, SEB and EFG Eurobank - now that´s a sell list of European Banks, ripe for government intervention/stakeholding/takeover.
As if to underscore how dire the situation for this group of banks is, the Flemish government decided to shore up KBC;s balance sheet with a 2Bn Euro cash injection after KBC presented a 2.5BN Euro full year loss for the 2008 fiscal year.
Once the bounce and consolidation in the European banking sector has run its course, it is highly likely the overall downward trend will resume itself. We are currently witnessing Banks getting scoped up by governments left, right and centre. One has to wonder who, if any, banks will be left standing on their own feet once this is over. Recapitalisation needs are rolling in for the overall corporate sector (excluding banks) and they will have a rough time, for sure. Dont expect any banks to reach out a hand anyway. They are looking for palms themselves.
Summary;
The Euro bearish story continues, the Jpy to remain strong.
I will use market corrections to reposition.
European Banks stocks are on a structural trend downwards due to underfunding and collapsing assets held as securities, expected creditlosses and non mark to market balance sheets, leaving gaping holes in them. In Europe, the situation has been made even worse than elsewhere, due to a lack of fiscal and monetary expansionary and proactive measures.
Creditlosses and ensuing recapitalisation needs are expected to be huge, forcing governments to step in at a quicker pace than what has been the case thus far. The CEE countries downward spiral will obviously not make things easier.
Right here and now technicals seem to warrant consolidation and correction, before we continue the current market trend down - an opportunity for me to reposition.
As always, good luck
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