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Good morning,
Markets are called lower this morning. This is what's happening today:
Markets are called lower after yesterday's hype in the markets when the news was out that Spain was going to apply for a bailout package. It shouldn't have come as a surprise that the markets reversed gains during the session because the markets had rallied in the previous week on the news that Spain will apply for a bailout package. It was the traders who marketed up prices at market open that created a hype in the early hours of trading. Prices soon came down as investors traded stocks on the market trying to make a quick gain.
Although it is good news that the Spanish government is going to apply for a bailout package there are also concerns. The main concern remains the domino effect and the willingness of the 'core' to fund the 'periphery'. We still need to know how the new debt will affect holders of current Spanish debt and from where the money will come. Too many details about the plan are still missing at this point in time. How much do the Spanish banks really need? How will this effect current debt holders? and what's going to happen to Greece as the electorate go to the polls this Sunday?
Don't forget that this additional debt will increase the debt/GDP level of Spain to 100% which will continue to increase the spread between German and Spanish bonds. We have a sovereign crisis in Europe and this needs to be solved before volatility in the markets decreases and we start seeing a steady rise in the markets.
Don't forget that just two weeks ago, the Spanish government said that they do no need any help from the EU. The fact that they are going to ask for a bailout package of E100bln adds to uncertainty because investors keep on worrying that governments in the Eurozone are not transparent and this makes prices much more difficult to determine and hence risk aversion increases.
At this point in time, it would be prudent to wait for the Greece elections to pass before adding to positions in stocks. Although you might have to pay higher prices next week, one must appreciated that the higher price comes with less uncertainty and in these markets it would be the most prudent thing to do.
Malta Government Stocks – check out our website for our research report
We are of the opinion that if the prices are issued in line with our expectations, the most attractively priced MGS would be the 5.1% MGS 2029 (I) which we expect would be issued at a price of €101.75 yielding 4.95%. However, it is important to be aware of the long duration of this bond which although should not of be of a concern in the short term could become an issue once the economy starts to improve and the ECB starts raising rates. We advise our clients that all bonds, especially those with long duration should be monitored periodically in order to see how the price is reacting to changes in the economy.
Stock to watch: Apache (Price $81.83, Price Target $119)
Our Buy rating at APA is driven from our view of the company as a core holding amongst the E&Ps due to a diversified asset base, commodity leverage, and track record of capital discipline. A combination of ~$10 Bn in asset & corporate acquisitions in 2010, and the sanction / startup of projects from the development pipeline both position APA well for re-investment visibility and growth over the coming cycle. Despite this solid longer-term outlook, we see some overhang to the outlook (e.g. Van Gogh, Kitimat costs) which should be put in the context of our longer-term structurally positive view of the company.
For further information on Apache or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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