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Good morning,
Markets are called to open flat. This is what's happening today:
The US markets are closed today for a national holiday. The markets have been selling off after Obama was elected President for many reasons but one of the reason is the worry that if the President doesn't come up with the austerity measures to reduce the fiscal cliff in the next budget, congress will do it itself and send the US into recession in 2013. However, Pimco, which runs the world’s largest bond fund, sees as much as a 70 percent chance a compromise will be struck. Lawmakers from both major US parties and investors including Pimco predicted a resolution to the standoff on the so-called fiscal cliff that threatens to trigger $607 billion in tax increases and spending cuts. This is good news for US markets but unfortunately they are closed today.
Its like bad news cannot stop coming to the markets. We just hear that the US is confident it will find a compromise that won't send the country into recession in 2013 and we now get negative GDP data out of Japan. The Japanese economy shrank by 0.9% in Q312, the first contraction of the three before the country is back into recession. We are expecting further weakness in the Yen as the Central Bank Governor sighnaled the country remains distant from its 1% inflation target, increasing speculation that policy makers will expand stimulus.
Moving on to Europe more bad news out of Greece. Greece's parliament approved the budget for 2013 with the necessary austerity measures required by the EU to get the next tranche of bailout money. Greece has E5bln worth of bonds maturing this week and if it doesn't get the E31.5bln bailout money this week, Greece will default on its payment.
The market is confident that the EU finance ministers will give Greece the money however there are problems. First of all the EU ministers will be meeting today however, iti s more probable than not a a decision won't be made today and another meeting would have to be held. The reason for this is that the only reason why the EU is helping Greece is if its debt/GDP will reach 120% by 2020. According to the latest report by Troika this is impossible. The problem is that the ECNB, Troika and IMF are not agreeing on their expectations of Greece's debt/GDP by 2020 and what should be done.
Greece was meant to have a budget surplus in 2014 which would allow the country to reach a debt/GDP target of 120% by 2020. However this is highly unlikely. What is more realistic is that Greece will have to wait 2 more years that first expected in order to have a budget surplus (i.e. in 2016 and not 2014). This means that Greece will have a devt/GDP ratio of 120% in 2022 and not 2020. The problem is that Greece's debt/GDP ratio is expected to increase to over 190% next year.
It is unlikely that the EU ministers won't give Greece the money and the markets are pricing in that it would. However, it could be that the austerity measured placed into the budget are not enough and Greece would have to do more in order to get the next E31.50bln and avoid a default this week. All this uncertainty will certainly create more volatility in the market.
Regarding Spain, everyone is waiting for Rajoy to ask for a bailout. The reason why Rajoy still hasn't asked for a bailout is because he is worried that the bailout money will not improve the situation of Spain and just be s short term fix. He wanted to know also how much the ECB will push down Spain's borrowing costs. Last week Draghi addressed Rajoy's concern and said that the ECB cannot give assurances however, Spain should ask for the bailout. Obviously if Spain does ask for the bailout money, Italy will take advantage of this as Italian yields would also fall.
Alot still to digest in the markets though it seems that there is a solution for all these problems in the short term. There are three catalysts which would determine a rally in the markets heading towards the end if the year. We need to know that the US has a plan that is acceptable by congress and it won't go into recession in 2013, we need to know that Rajoy asks for a bailout and we also need the know that Greece will get the bailout money and avoid default this week. The sentiment is that all three will come in good. However, everything is possible in these markets. My opinion is to hold on to your positions because despite the negativity we are seeing at this point in time, it is a good time to be invested. Remember that it is in bear markets that you should be positioning yourself in the markets and building positions to participate in bull markets. It doesn't make sense to start out buy in a rally and risk buying stocks and bonds in a bubble.
Stock to watch: Visa (Price $142.93, Price Target $150)
Deutsche Bank Comments: With most of the regulatory clouds lifted and a new strategy in place, we believe Visa can start executing on its new pricing plan and capitalize on its dominant market position in the growing secular move towards electronic payments. Buy.
For further information on Visa or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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