(Repeats Friday item without changes)
LONDON, May 25 – Following are five big themes likely to
dominate thinking of investors and traders in the coming week
and the Reuters stories related to them.
1/ BANANA SKINS
European officials’ public acknowledgement that Greece could
end up leaving the euro has been taken a (logical) step further
as contingency planning has begun, at least at national level.
But financial markets have yet to see any pan-European plan –
either to avert a Greek exit or to handle its aftermath. The
pace at which measures of volatility are rising in the FX and
stock markets might have slowed for now, but there is no dearth
of factors that could change this in the absence of such a plan.
Greek political rhetoric in the run up to the second election on
June 17 and how other euro zone countries – particularly Germany
– react, budget slippage in Spain, or any acceleration in bank
deposit outflows from highly-indebted euro zone countries are
just a few of the banana skins on which markets could slip in
the coming week. And that’s even before the U.S. jobs report is
released on Friday.
> Euro zone to prepare for Greek exit scenario
> Latest top stories on euro zone crisis
> Assets’ performance since first Greek election
http://link.reuters.com/keh38s
2/ BLIGHT
Greek exit risks are compounding pressure on the financial
assets of other highly-indebted euro zone countries, with
Spanish underperformance particularly pronounced. For example,
Spanish stocks are underperforming both the wider European stock
market index and Italian shares. Also, Spain’s government bonds
have been underperforming Italian ones, and, worryingly, the
bid/offer spread on the former has been widening even as it has
narrowed for Italian debt. The problems plaguing Spain’s banks,
households, and regions make it unlikely that this trend will be
reversed soon. However, Ireland might snatch the spotlight in
the coming week given its May 31 referendum on the European
fiscal pact. The problem is, even though financial markets
expect voters to approve the pact, markets speculate that
Ireland may not be able to fund itself as soon as it had planned
with the Irish 2/10-year yield curve set to invert and two-year
CDS trading wider than five-year default swaps.
> Bonds signal Ireland could need more help
> Split between domestic and foreign holders of Spanish and
Italian debt http://link.reuters.com/kux87s
> Bankia set to ask Spain for help
3/ PREPARING THE GROUND
European Central Bank officials can, if they want, lay the
groundwork in the coming week for any change in tone, stance or
strategy that might be in the works for their June 6 meeting,
the last scheduled rate-setting meeting before the Greek
elections. Traditional gauges of money market stress, such as
euro/dollar cross currency basis swaps, aren’t yet in danger
territory, given the ECB’s cheap three-year loans and the dollar
swap lines that banks can tap if they really need the funding.
Nevertheless, problems may be lurking beneath the surface of the
more opaque repo funding market. Dwindling liquidity in the
Spanish bond market, highlighted by the widening bid/offer
spread mentioned above, could end up spurring LCH.Clearnet to
increase the cost of using Spanish bonds as collateral. Such
margin hikes have so far been moderate, but the recent history
of Ireland and Portugal shows that a vicious spiral can develop
since rising margins make it increasingly less attractive to
hold Spanish bonds.
> All Reuters news on ECB
> German 2-year bond yield vs ECB rate
http://link.reuters.com/zap38s
> Interactive map of flow of deposits in Europe
http://link.reuters.com/wud38s
4/ RIPE FOR MORE LOSSES?
The euro has crumbled under the weight of Greek exit
speculation and the record number of bets against the single
currency has not deterred institutional and macro funds from
stepping up sales, especially against the dollar. Short squeezes
higher can’t be ruled out given euro/dollar is currently on
track for its worst month so far this year but chart-watchers
are looking for an eventual slide to the 2010 lows of around
$1.1875. One- and three-month implied volatilities have pushed
higher in the past week, resulting in a sharp flattening in the
vol curve, and risk reversals are firmly in favour of euro puts.
Euro selling is causing headaches for central banks in
neighbouring countries. The SNB’s Swiss franc ceiling is
continuously being tested and the premium for Swiss franc calls
against the euro is at its highest since August 2011, suggesting
pressure is building. In Denmark, the central bank has been
forced to cut rates to keep a lid on the crown, which is being
used as a hedge against the risk of a euro breakup.
> Greek exit risk challenges Swiss franc cap
> Danish crown used as euro break-up hedge
> Are UK bonds a riskier bet than they look?
5/ INVESTORS REAP WHAT BANKS SOW
German stock markets have fared far better than most in the
euro zone so far this year but even on the Frankfurt bourse,
financials have tended to lag. The broader European trend also
shows that big investment banks, insurers and exchanges have
generally underperformed. That’s unsurprising given the sector’s
sovereign exposure and Q1 earnings performance. More than half
of European financials missed estimates during the Q1 earnings
season, a worse showing than managed by the constituents of the
Euro STOXX 50, of whom 60 percent met or beat forecasts. Given
the focus on the amount of cash being taken out of banks in the
euro zone periphery, euro zone money supply data on Wednesday
will be of keen interest, as will earnings from a host of Greek
banks.
> Graphic on national equity market performance in 2012
http://link.reuters.com/hew86s
> Investors lose faith in valuation compass
> Rolling global markets report
(compiled by Swaha Pattanaik; editing by Ron Askew)
