Forex outlook? Spain set for 7.75% yields and EURUSD to 1.20
· Spain. The considered reaction on the Spain bank bailout has been very negative with 10yr Spanish yields surging to 6.83% on Tuesday from a low of 6.02% yesterday morning and meeting the TP&V target of 6.75% after the 11th June climax day – see TP&V 23rd May (email email@example.com for a copy and to receive future issues). The critical concern is that Spain could face the need to bailout the sovereign at a future date (IDEAglobal estimates Eur350bln until end 2015), but that such a bailout would really subordinate private sector holders if it subsequently lead to a PSI in future years. More aggressive liquidation by non-domestics is likely to be evident in the coming weeks and IDEAglobal TP&V still projects 7.75% by the end of June.
· Rising Bund yields during risk off. Sovereign credits followed Spain wider led by the Italian curve and with a noticeable widening in senior financials and cross over corporate indices as well. However, 10yr Bund yields also rose noticeably and clearly underperformed Treasuries, JGB’s and Gilts. Concern is growing that the Eurozone could be heading for an end game that could mean either defaults (that would hurt Germany finances) or game changing rescue (that means new major commitments). At a minimum sentiment is clearly shifting tactically to Bund underperformance versus other safe havens, which is important for all Eurozone assets. It can push sovereign yields higher everywhere & could speed up safe haven flows out of the Euro and pressure the currency. Eurozone equities have lagged these critical themes in other Eurozone market during the past few days and are now becoming highly vulnerable before the Greek election on June 17th. TP&V still targets down towards 1.20 and southern Eurozone equity market weakness.
· ECB. Financial stability reviews normally get overlooked, but it is worth pointing out last night’s downbeat report from the ECB (http://www.ecb.int/press/pr/date/2012/html/pr120612.en.html). Financial stability is seen to be very challenging, with undue reliance on central bank funding & three main risks: Aggravation of debt crisis; weak banks; excessive bank deleveraging.
Only a Feddie can change the trend in US Dollar for sometime… if its ops. twist then for few weeks…
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