Political turmoil in Portugal pushes the country’s 10-year bond yields to climb to 8% for the first time since November 27, sparking fears the country will have to request help from the ECB. Two high profile ministers resigned from Portugal’s government over the past two days, triggering worries of instability within the government; and today, there are reports that more ministers are expected to step-down as the country struggles to stay on top of its austerity plan. In light of these developments, the ECB’s policy meeting tomorrow in that case will be this week’s show stealer as the pressure is on Mr. Draghi to respond to the state of affairs in Portugal’s crumbling government. Portuguese media are today reporting that Agriculture minister Assuncao Cristas and Social Security minister Pedro Mota Soares are set to resign – both are part of the Conservative Popular Party, the junior coalition partner whose leader Paulo Portas quit last night. Spanish and Italian bond yields are spiking in reaction; the euro gets knocked down by rivals, now below $1.30 while in stock markets across the region, Portugal’s PSI is currently down around 6.7% with banks leading the fall, while core European indices are all posting losses overt 100 points. Peripheral stock markets are being battered with Spanish and Italian stocks tumbling. In a sign of risk-aversion, core government bonds [seen as safe-haven investments] are in favour with German bunds up around 78 ticks and UK gilts up around 69 ticks. The political uncertainty in Portugal has really spooked markets as the spectre of another bailout for the country increases on fears of a collapse of the government will result in the country not being able to meet its loan obligations with its international creditors. This could trigger a sovereign default and potential removal from the euro zone, with contagion spreading across to Greece, a country that is currently struggling to secure its next tranche of aid money. Staying on political uncertainties, Nymex oil prices soared above $100 mark, its highest level since April 2012 on the current situation in Egypt. The country’s government and army are set for a stand-off after both sides refused to back down over an ultimatum set by the army for President Morsi. Morsi has rejected stepping down, warning his removal would spark bloodshed across the country. Morsi’s speech last night provoked clashes between protestors and Morsi-supporters who have taken to the streets of Cairo since the weekend. The situation there remains fluid, with investors worried that we could see a repeat of the crisis in the country back in 2011 which saw the removal of Hosni Mubarak. Overnight in Asia, China’s poor official non-manufacturing PMIs shook up investors, overshadowing the HSBC China services PMI which was a touch better. Market participants viewed the data as another signal that China’s economy is facing a slowdown which could last much longer than previously expected; this sparked the Australian central bank to signal that it could continue cutting interest rates as long as the country’s mining industry remains under pressure owing to the slowdown in China – the Aussie dollar fell sharply on the back of those comments. In the US on Tuesday, strong factory orders and bumper cars sales in the US for some global auto makers was seen as investors as another reason for the Fed to ease its foot off the stimulus pedal. Closer to home in Europe, the poor China data and comments from the Aussie central bank have led to a slump in basic resource shares in the region, hitting the mining heavy UK’s FTSE100 in particular. Banking stocks in Europe are feeling the heat on the Portugal political woes together with S&P ratings cutting the ratings for Barclays, Deutsche Bank and Credit Suisse overnight, rating all three at A from A+. The ratings firm cited uncertainties over the outlook of European investment banking models, increasing regulator risk together with uncertain market conditions going forward. This is a backward looking move by S&P who are behind the curve addressing these issues faced by investment banks but does highlight the ongoing regulatory risks banks face which are significant headwinds going forward. Banks will need to continue to de-leverage/bump up capital in order to remain profitable or be taken out while the libor scandal and other litigation risks remain a hefty drag on the investment banking sector too. Volatile markets, unwinding of QE by the Fed, low-growth environment in euro zone all pose additional risks for the outlook of European banks, dimming the long term attraction of the industry. The outlook for European banks appears to be pretty murky as management at global banks have to balance the task of deleveraging/disposing risky/toxic assets, shore up capital and balance sheets all whilst obeying new banking regulations and the set up of a European banking union in the years ahead. ________________________________________ Ishaq Siddiqi Market Strategist
Posted on: Wed, 03 Jul 2013 08:29:49 +0000
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