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Capital Markets Recap
This is not a good development…
Larry’s open for the 2012 summer. Don’t know about Larry? Click here.
What many considered to be an impossibility now seems to be an inevitability. I’m referring, of course, to Greece exiting the Euro. The worry du jour is a run on the Greek banks. You might consider the metaphor of an infected toe–no big deal; it’s just a toe. And, indeed, it’s just Greece to anyone outside of Greece. The fear, however, is that the toe’s infection might be contagious. In this case, that amounts to fears in Greece extending to Spain and Italy. What’s more, in this era, it’s more likely to be a bank click than a bank run, given the ease of online banking. According to The Economist, about one third of Greek deposits have left the banks over the last two years. Such a run would leave banks less well capitalized, precisely at a time when they’re likely to see increased losses.
Curiously, the Euro fell to its lowest level since mid-2010. One of the reasons put forth on the stubborn strength of the Euro is that whatever Euro countries remain will be leave the currency stronger one way or another. Either the weaker countries will have left or they’ll be speaking German. That reasoning gave way this week, as it became clearer that at least Greece was getting closer to leaving the building. I’ve recreated a trio of what-to-monitor indicators (shown in red) as put forth by BCA Research, and only one gives a reason for the Euro breakdown (the Euro is shown in the fourth panel.) The top panel shows spreads–i.e. the default risk premium–on Spanish and Italian 10-year bonds. The spread is the incremental yield of each over the 10-year German Bund. Funding stress (second from top panel) is modest, while absolute Spanish and Italian 10-year yields (third panel) are elevated they’re well below peak levels. These are the yields that matter for Spain and Italy, as they represent their funding costs.
I’m cursed with curiousity, so this video was very satisfying to me. If you ever wanted to know how your iPad or smartphone knows which way you’re holding it and when to deploy the airbags. Cool stuff.
In spite of this parade of negativity, you should be inching closer to the BUY button than the SELL button, as the negativity piles up in the minds of other investors, too. I’m guessing that when we’ve heard the Greece is leaving the Euro currency, the market will barely more, and is more likely to rally.
I’m struggling to find anything to mention from the realm of U.S. economics, but University of Michigan Consumer Confidence merits a mention, as it reached to a level last seen prior to the 2008/2009 recession. That rebound hasn’t yet been seen in the ABC and Conference Board surveys, although both are heading in the right direction.
Key indicators to watch
- ADP Employment Change index
- Q1 GDP, take 2
- Initial Jobless Claims
- Nonfarm Payrolls
- Unemployment Rate
- Personal Income, Spending, & Saving
- ISM Manufacturing
- Dallas Fed Manufacturing Activity
- Chicago Purchasing Managers index
- Pending Home Sales
- S&P Case-Shiller Home Price index
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors