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Big money tiptoes back to Europe
16 Jul 2010, 0059 hrs, REUTERS
LONDON: Whether the Eurozone is at the middle or end of its existential sovereign debt crisis, investors are starting to take a fresh look at the region’s assets and wondering if this year’s market panic was overdone.
Few analysts would be brave, or rash, enough to sound an “all-clear” on the regional financing storm — one seeded by Greek government profligacy and dodgy statistics but which also exposed flaws in the single currency’s framework and spread rapidly to other highly-indebted euro governments.
The global reverberations through April and May saw equity volatility (VIX) — the seismograph of financial shocks — soar to levels not seen since the depth of the 2008-2009 global recession, even as Eurozone industrial production growth was roaring at an annualised rate in excess of 10%.
Spooked by a lack of visibility and heightened political risk, investors scrambled to reduce exposure to euro government debt, underlying equity markets and banking stocks and the euro currency itself. Conviction about the likely outcome was less important than the fact it was impossible to see a road map.
Yet after three months of infusing market prices with “tail risks” — or worst-case scenarios from cascading sovereign defaults to banking system collapses and euro breakup — money managers are again looking for opportunities to exploit the resulting price extremes in the event of more probable outcomes.
The question now is whether that euro asset phobia has run its course and whether EU policymakers have managed to create a firebreak with their May 10 rescue package for euro bond markets.
Two months on, a progress report shows the authorities have at least reached first base — stabilising bond prices with selective buying by the ECB and stopping the hysteria, contagion and self-feeding spirals that forced Greece to be locked out of capital markets altogether.
Debt market premia for the peripheral Eurozone governments, with the exception of Spain, are all below pre-rescue levels. And despite a credit rating downgrade in the interim, Spain has continued to sell bonds around the world to brisk demand. — Reuters
European equity markets have rebounded by six percent, while equity market volatility has almost halved. Even the euro has managed to return within a whisker of pre-rescue levels against the US dollar.
RESCUE REACHES FIRST BASE
So far, so good then. For euro governments, time has been bought to get parliamentary approvals for the rescue; establish a special financing vehicle to act as future fireman; rebuild confidence in European banks via stress tests and — crucially — pass austerity budgets to fill in widening fiscal holes.
For investors, the political fog starts to lift, visibility returns and they can resume what they do best — assess valuations, high-frequency economic and earnings data and relative pricing.
16 Jul 2010, 0059 hrs, REUTERS
LONDON: Whether the Eurozone is at the middle or end of its existential sovereign debt crisis, investors are starting to take a fresh look at the region’s assets and wondering if this year’s market panic was overdone.
Few analysts would be brave, or rash, enough to sound an “all-clear” on the regional financing storm — one seeded by Greek government profligacy and dodgy statistics but which also exposed flaws in the single currency’s framework and spread rapidly to other highly-indebted euro governments.
The global reverberations through April and May saw equity volatility (VIX) — the seismograph of financial shocks — soar to levels not seen since the depth of the 2008-2009 global recession, even as Eurozone industrial production growth was roaring at an annualised rate in excess of 10%.
Spooked by a lack of visibility and heightened political risk, investors scrambled to reduce exposure to euro government debt, underlying equity markets and banking stocks and the euro currency itself. Conviction about the likely outcome was less important than the fact it was impossible to see a road map.
Yet after three months of infusing market prices with “tail risks” — or worst-case scenarios from cascading sovereign defaults to banking system collapses and euro breakup — money managers are again looking for opportunities to exploit the resulting price extremes in the event of more probable outcomes.
The question now is whether that euro asset phobia has run its course and whether EU policymakers have managed to create a firebreak with their May 10 rescue package for euro bond markets.
Two months on, a progress report shows the authorities have at least reached first base — stabilising bond prices with selective buying by the ECB and stopping the hysteria, contagion and self-feeding spirals that forced Greece to be locked out of capital markets altogether.
Debt market premia for the peripheral Eurozone governments, with the exception of Spain, are all below pre-rescue levels. And despite a credit rating downgrade in the interim, Spain has continued to sell bonds around the world to brisk demand. — Reuters
European equity markets have rebounded by six percent, while equity market volatility has almost halved. Even the euro has managed to return within a whisker of pre-rescue levels against the US dollar.
RESCUE REACHES FIRST BASE
So far, so good then. For euro governments, time has been bought to get parliamentary approvals for the rescue; establish a special financing vehicle to act as future fireman; rebuild confidence in European banks via stress tests and — crucially — pass austerity budgets to fill in widening fiscal holes.
For investors, the political fog starts to lift, visibility returns and they can resume what they do best — assess valuations, high-frequency economic and earnings data and relative pricing.
