Steen's Macro Brief: Germany's and the EU-bonds, S&P predicts Greek bankruptcy this year, The Finland Clause, and dividend yield higher than 10 year

Dear All,

 

Plenty to deal with – my quick thoughts this morning. Enjoy. Steen

 

Source: FT.com

 

-          Germany continues to play hard-ball on Euro-bonds as they seek Debt-breaks Constitutionalised in the EU.

-          Greece looking at minus 5 per cent GDP this year – this while the Troika is in Athens to asses “progress”meanwhile Finland has denied further payment before they get collateral – this could stall the second payment AND is now called the Finland-clause, which both Austria and Holland is likely to join. This is major “break-down” in EU commitment and the combined Germany and Finland clause tells us its only a matter of time before the funding for banks dries up.

-          Italian banks borrowed EUR 80 bln.  Last week – 1^st time they took money in a long time…

-          Spanish and French banks CDS now wider than during the 2008 crisis

 

Source: Bloomberg LLP & Saxo Bank

 

-          The increased tension in interbank can be seen by increased deposits under ECB’s “deposit facility” where 90 bln. EUR was parked last Thursday. (This make no sense unless you DON’T want to lend out to other banks!)

-          The talk over the week-end was about: Japanisation – and the fact that US yields (10 year) broke 2 per. When Japanese yields broke below 2 per cent in 1996, they have never risen above it for any sustained period since! – i.e: decades of deflation, no-growth, no-productivity and a move from equity to bond risk in portfolio’s. The Nikkei 225 is still 75 per cent below its peak from 1989

-          Market is extremely oversold going into Bernanke-week or Jackson Hole week: 42 bln. US dollars was pulled from equity funds so far this month, biggest since February 2009 (low in S&P was March 2009 at 666) – 110 bln. Total has left equity since May and the announcement of exit from QE. On the Jackson Hole we need to take into account the way Bernanke things. Do not forget that when he talks about Japan’s lost decades he thinks it was due to inactivity, too little too late in terms of printing/asset buying. With growth forecasts now at one per cent of below for 2011 H2 it is absolutely clear to me that he will force the hands of the FOMC. He may not get full support, but he firmly believes in QE and OT(Operation Twist). His legacy is on the line, and changing course would be detrimental to his “academic image” – hence there is increased odds of QE3 – and not OT in my opinion. We constantly fail to understand how bureaucrats and politicians will do anything, and I mean anything to keep the illusion going. The lower S&P goes this week the more likely is full QE3 – and OT. Maybe even both.

-          It’s worth noting one key change last week: Dividend yield on S&P500 is now higher than 10 year US bonds. I will not make call to go long stocks yet, but clearly I would rather one basket of S&P500 stocks than a 10 year US bond for the next 10 years. (Having said that the analogy to Japan is tempting where 10 year now yields 0.99 per cent)

 

US 10 year yield 2.08 Per cent (Source: Bloomberg LLP)

S&P500 Dividend yield (Source: Bloomberg LLP)

Strategy:

 

We are entering extreme oversold condition, the EU politicians are at a new low in verbal non-sense and there is growing  tension in funding markets. This calls for desperate measures and actions and this week could set up H2 of this year. We called Q3 Maximum Uncertainty in our Q3 outlook – for now my Q4 title will be: Maximum Intervention (subtitle: end of the managed economy (dirigisme)

 

Keep the powder dry: CHF, US and German Yields are out of line with reality. Fear is the norm, and averaging into equity exposure should be the name of the game from here.

 

Steen Jakobsen

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.