About a week ago I was writing about how it was getting near that time for the politicians and central bankers to intervene. It all that smell about it of ‘Do something or this whole thing is going to blow’. I also wrote that I expected the positive market reaction to last a little less long than it has in the past (the LTRO news boosted the markets for all of about three months).
So the news on the bail-out for Spain was duly announced today amid shouts of ‘Victory for the euro’ from Mr Rajoy and others, and the market’s reaction…..Well, it’s flat after a euphoric 1.5% rise first thing today, but a) watch the currencies and b) of course, watch the Spanish (and Italian, and French) 10 year bond yields. The euro is 1% weaker today against both the pound and the dollar, and Spanish bond yields, far from falling in the wake of the €100 billion rescue, are up to 6.45% as I write. Sorted? Hardly, and that’s after throwing €100 billion at the problem. Over to the politicians and central bankers for more sticking plaster, fast.
It’s that time again. The pattern goes something like this, and it shows why investors are loathe to put their money on what seem like banker bets (such as the collapse of the euro, which has seen many a hedge fund lose its shirt over the past two years). The markets (particularly the bond market vigilantes) drive the value of a financial instrument such as a 10 year Spanish or Italian sovereign bond to breaking point. When all seems lost and the breaking point seems finally to be reached, in comes the ECB, EC or whatever other life-saving body to announce some ground-breaking measure (it was the long-term refinancing option or LTRO last time) which dramatically changes the lie of the land. For a short few weeks, everybody thinks the problem might be solved – in other words, it’s RISK ON again and the markets charge north.
With Spanish 10 year bonds yielding 6.7% today, deep into the danger zone, and Italian bonds also now above 6%, the moment for the politicians/central bankers to intervene is upon us again. So expect an announcement of a radical sort any time now as another rabbit is pulled from the hat, but my guess is that the market won’t be quite so quick to believe the central bankers’ claim that they’ve solved it this time. They’ve come to realise that the sticking plaster solutions to the eurozone don’t work for longer than a couple of weeks and that major surgery is required which may even threaten the life of the patient. The fundamentals are out the window and nobody has a clue what anything is worth any more. Not easy being an investor in these markets.