Friday, June 4, 2010
Europe is Back ALL Over the Headlines
No more BP. Europe in the headlines is everywhere this morning as Hungary is falling apart spreading to Austria, Spain bonds are blowing out, along with cds from some of the major countries (i.e. Germany and France), and Euro approaching 1.20. We are 15 minutes from the NFP report. It doesn't matter. Futures down but holding in there compared to news flow ahead of this report. If this number does manage to get the market positive you sell it.
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"We believe that yesterday's dramatic comments were intended for domestic consumption and were used to build a dramatic backdrop that would let Fidesz backtrack on a large share of its campaign promises and broadly continue with the fiscal policies of the previous government, as well as preparing the ground for another round of IMF talks. Exaggerating the state of public finances left by the previous government, pretty common as it is (the incoming UK government used very similar tactics), supports the arguments against fiscal expansion and, in the future, will back up the claims that the crisis management plan was successful in reducing public deficit. The party faces local elections in October and not following up on the election promises risks alienating the voters, while blaming the 'imminent crisis' and 'fiscal skeletons' helps it save its face. At the same time, inflating the deficit forecast gives it space for negotiations with the international lenders and increases the chances that the potential new program will allow for some fiscal loosening in 2010 and 2011.
The claim that the country is on a brink of sovereign default and risks following the Greek path does not hold up against the facts. Hungary has already faced a crisis and asked for IMF and EU assistance in late-2008. In this context, Hungary is some 18 months ahead of Greece. Next, Hungary is not an EMU member and by having its own currency and domestic and external debt benefits from having a captive investor base. Finally, Hungary still has access to the undisbursed tranches of the IMF/EU loans. Our analysis (New Markets Analyst 10/04) shows that under the current policies debt stock is stable and that the country will be able to rollover its maturing debt without a problem." - Goldman Senior European Economist
Yep - Goldman spin machine in full force. Hmm, I could post all sorts of things from November 2009 to April 2010 saying Greece would have no impact on Europe. They got that one right. Also could post all sorts of Goldman propaganda over the last five months that the Euro would not drop below 1.30. Got that right also.
In this sort of stuff they are a better contrary indicator than anything. I bet you their prop desk isn't selling Hungary CDS. Contagion is real as the CDS blow out across Europe shows this. Goldman may be completely right in analysis of what Hungary was trying to do and completely wrong in understanding the cantagion impact and market impact.
Consider the impact of this on Hungary banks. Who owns tons of Hungary debt? Well Austria banks of course. Austria has been tipping back and forth in danger zone for close to a year. Who owns most of the Austria debt. Awww. Why Germany. And the impact this has on fears of other nations that are also in real danger zone....let's see Italy is down over 3%. Spain down over 4%. More importantly is major Spanish banks are down over 7% which is where Spain's danger lies.
The most important point of all is this. If BP is dominating the headlines that is bullish. If Europe is dominating the headlines that is very very bearish no matter whether one thinks it should be having an impact or not. After being out of the headlines for about a week Europe is back in a major way.
The world is quickly going into a death spiral.
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