Commentary: “Estaré a tu lado por siempre, tú puedes robarme el aliento”
Enrique Iglesias probably wasn’t singing about the Spanish banks when he offered to be a hero. Sadly after a perky start to June by equity markets following the dampening squib of May’s markets, the eagerly anticipated bailout package for Spanish banks arrived, sent markets higher this morning then saw them deflate as investors digested the details of the circular quick fix.
The Pavlovian response cycle is getting shorter and shorter, and if the salivating market dogs don’t get some real food when the bell rings they might turn nasty and start biting the bell ringers. After a dramatic lurch down on the first day of the month, a Friday, the first full week of June saw a 2.4% rise in the broader MSCI AC World Index, leaving the monthly return to last Friday in global equities at +0.7%. Today has stripped 0.8% from this after the US equity market turned south. Macro concerns have dominated markets and gathered pace.
Holders of debt issued by “safe” governments have continued to enjoy price rises and ever lower yields. The US ten year bond yield closed at 1.59% yesterday, and the German government can get money from lenders at 1.33% for the next decade. The UK can borrow for the next decade at 1.68%, or for the next thirty years at just over 3%. These yields are pretty clear signals of the struggle investors anticipate for the developed world to generate economic growth. US GDP estimates for the second half of 2012 are being downgraded, for instance by ISI, to an annualized 2%.
Manufacturing industry surveys (global PMIs) have come in with weak readings, and the US employment data for May was weaker than expected. In Europe the increase in weakness came from the core economies. Data from China and Brazil has been disappointing. Equity market weakness in May anticipated much of this. The threat that lies ahead is of further slowdown.
The prospect is for a policy response. Although the Bank of England’s Monetary Policy Committee resisted announcing further QE at last week’s meeting, the Chinese cut their interest rate by 25bps last Thursday (including the first loosening in eight years of the lending rate floor and deposit rate ceiling), and there is some prospect of renewed US easing at the June FOMC meeting.
However, the major threat concerning investors lies in the eurozone, with the fear that policy makers will let matters get out of hand, either because they are too slow to face up to or implement the structural solutions that will ease investor concerns (eg euro wide banking regulation and guarantees; increased fiscal integration; peripheral member reform and stimulus), or because Chancellor Merkel is playing a game of brinkmanship to drive reform and austerity in the periphery. Even though Germany may be ready to step in to prevent a crisis spiralling out of control the shortening Pavlovian response cycle suggests they may end up being too late.
Spain received a bailout over the weekend, of €100bn after previous suggestions of €40-60bn. Closer observers of the scale of valueless lending in the 2000s estimate the true capital shortfall for Spanish banks could be €600-700bn. Given the mixed response to this package, the full amount may end up being sought, one way or another, later this year. The next euro bump ahead is the Greek election on 17th June. The see-saw year is set to continue.
Issued by: Rupert Caldecott, CIO of the Global Asset Allocation Team, Dalton Strategic Partnership LLP, an investment management boutique in London founded in 2003 by the late Andrew Dalton