The image of Nero playing a fiddle while Rome burns is just too clear in my mind today.
- Spanish Bank Bailout 10 days old and no details
- No Greek Government and no clear sign of how EU will deal with Greece
- Spanish Bank Audit Delayed
- EFSF available but no new programs have been launched
- ESM, talked about as though it is real, but not yet finalized and not indication of hurry
- Spanish T-bills yield about the same as Greek T-bills but 10 year bonds about 70 points difference (for now)
- Austerity is important, but not to the 7,000 G-20 attendees
- EC President Barroso is talking up a storm and lecturing others – rarely a good sign
Financial markets remain bifurcated. Yields in Spain and Italy are awful across the board. The key 2 year yields are not setting records yet, but have entered into the “unsustainable” territory.
Stocks, particularly in the U.S. have managed to do okay in spite of that. Not only bounce from 1,278 to 1,325 two weeks ago, they managed to grind up to 1,342 by the end of last week, and right now are set to add another small gain.
The disconnect between U.S. stocks and Spanish yields seems extreme and unsustainable. The only explanation is that in the next 36 hours, stocks are much more hopeful that the G-20 and Fed come up with something big. The clock is ticking down. Europe is burning, Madrid more so than Rome, but it won’t take much for the fire to catch there.
With G-20 announcements expected to roughly coincide with the Fed announcements around 12:30 tomorrow, there is hope that some new policies will be implemented. That Europe will finally announce a change of attitude and new programs. That QE3 might be launched. That China might join in on the liquidity party.
In spite of some doom and gloom, there is actually a lot that the EU can do, but they need to do it. The ECB and Fed (and maybe China) are the only ones who can say they will do something without exact details and be believed. The EU needs to provide details because they once again wasted the opportunity to act professionally in regards to the Spanish Bank bailout.
Fortunately, the market is giving you a chance to hedge. Stocks are higher than Friday. People were bidding up VIX last Wednesday when it hit 24.3, it closed yesterday at 18.3 and likely opens lower again today. At the same time stocks are set to open at 1,348 up from 1,315 last Wednesday. People buying puts ahead of last weekend’s Greek election were overestimating the importance of that election. People unwinding hedges are underestimating how much the market is relying on the headlines of the next 36 hours. In spite of all the “fiddling” comments, I actually expect policy makers to get their act together so remain constructive, but I have a growing fear that the delays and confusion are real and that the likelihood of a solid coordinated plan is dropping, so will be buying puts ahead of the close as a hedge.