The G-20 has come and gone. Nothing particularly positive happened, but since the market prefers to go higher on rumors of China throwing money at Europe, it keeps that option open. The G-20 and IMF seem to want the bankrupt countries of Europe help themselves more before they will provide them with lots of new money. Since the countries don’t really have the money, they will have to find new ways of getting it from the National Central Banks and the ECB.
The other source of “money” for these countries is the banks. Greek PSI should be concerning. Not just because of the laws that are being changed to help it along, but because the banks basically took another 3.5% hit based on IIF negotiations. As the banks rely more and more on the ECB and governments for money, they will become more and more of a tempting target for the politicians to take some money back from. I will be shocked if any European bank votes against PSI on their bond holdings. They do not have a choice in the matter – again, a little scary in longer term.
We might start seeing some people come out against PSI now, though I suspect they will wait, as it seems to be to their benefit to wait, especially if they own the March 20th bonds. At some point soon we should also see what bonds the ECB owns. This may change some strategies depending on how heavily their holdings are weighted towards the front end of the curve. If anyone is going to actually launch legal challenges to any of the actions being taken (as opposed to just holding out), we may see some activity there.
Overall I expect PSI related headlines will not be good for the market. Too many unknowns, and time and again, betting against successful implementation of plans has been a good and safe trade in Europe. There also seem to be a lot more politicians, particularly in Germany, coming out with sound-bites against the deal and against Greece. These aren’t the major players, but as more people have time to see the details of the deal, the more likely they are to realize what a mess it is.
The next LTRO is on February 29th. There is a big range in expectations of how it big it will be. The larger it is, the better for the market is the conventional wisdom. More carry trade. With a growing concern over banks that rely too heavily on the LTRO (bank spreads are well off their tights), we may see far less borrowing that anticipated. I think the banks have used LTRO1 to build up a war chest against their coming redemptions and aren’t looking for more money to add to their already overly large sovereign debt bets. The bulls will come back that a low take-up rate is a sign of strength in the banks. That would be more convincing if they weren’t busy pounding the table saying that a high take-up rate is bullish.
The other event on February 29th is the release of China’s Manufacturing PMI. It is back above 50, but the market will not react well if this drops back below that number. China has been easing and any evidence that it isn’t helping would be a concern, and the market hasn’t rallied as much on easing headlines from China as it used to. Maybe the number they decide to release will be strong, but it does come on what could be an interesting day for the markets.
Energy markets should remain in the spotlight. Oil and gas are a growing concern for many investors. I’m told by the Fed Chairman not to worry about them since they aren’t inflationary, but somehow, I worry about them.