Chart Of The Day


Boy does this feel like April 2010 or what?  The market melts higher just about every single day while obvious risks to the macro picture continue to also rise.  The two most glaring risks are QE and Europe.  As I’ve already highlighted, QE is likely to disappoint thoroughly from a growth perspective.  Meanwhile, the problems in Europe appear to be flaring up again. As FT Alphaville noted this morning bond spreads in Ireland are hitting new highs:

The rate increase isn’t unique to Ireland, however.  Greek, Portuguese and Spanish bond yields are all surging again.  The move in Irish rates is being attributed to concerns over the coming budget:

In what he calls a “scary scenario”, outlined in the Sunday Independent today, Mr McCarthy says “the game is up” if the Government flunks the Budget on December 7.

The sense of impending doom is also evident in the latest Sunday Independent/Quantum Research poll, which found that a massive 64 per cent believe it to be “inevitable” that Ireland will need the help of the IMF in the new year.

Mr McCarthy has said that if the Budget does “too little” to convince the financial markets, the Government will be unable to finance itself — “which means an IMF/European bail-out and economic policy dictated from outside the country for the first time since the State was founded”.

He warns that the country’s cash reserves will run low by next spring, unless Ireland re-enters the bond market with a “pretty big issue” of up to €5bn.

The risks in Greece are also re-emerging.  As FX Concepts CIO John Taylor highlighted last week, there is significant risk in markets due to the upcoming Greek election:

“Although the newswires have hardly mentioned Greece during the past four months, the situation in Athens remains difficult.  Even though most of the drastic measures have yet to be implemented the PASOK government is being roasted in the opinion polls, where 67% say that it is doing a bad job.  Municipal elections occur in two weeks and it seems clear that the Socialists will lose in all parts of the country, defeated both by the right and in some cases by splinter groups of all types.  Although one could pass this off as nothing more than an unimportant popularity contest, Prime Minister Papandreou stated this week, ”the citizens will give a clear signal where they want the country to go.”  If his party loses this support, he would call a general election as a referendum on the “Memorandum” with the EU, ECB, and IMF. Despite what the opposition calls his “blackmail,” the PASOK will lose next weekend and the Greek crisis will pop onto our radar again.  If Papandreou does call a general election, the risks will be enormous as the entire program will be placed under the looking glass once again – and the government will probably be defeated at the conclusion of the debate.”

Markets are pushing the issue in Europe and I expect markets to continue to push until there is some real resolution.  Although the ECB has applied a short-term fix the structural problems in the zone remain.  Austerity will only continue to put downward pressure on European economies and the recent rise in the Euro is likely to exacerbate matters as Europe hopes to export its way to recovery.

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