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Difficult tomorrows

May 8, 2012

Usually, if the financial operators are truly negative about an event, it shows immediately in the next day’s closing. I have to admit I was uncomfortable at yesterday morning’s opening, when I saw the CAC considerably lower. It didn’t make sense that François Hollande’s expected victory would have such an impact.  It is just not “market efficient”. Then yesterday afternoon, the CAC 40 closed 1.65% higher. Followed by other European bourses… all celebrating the return of growth policies? Well they haven’t returned yet, all this has to be confirmed, at the national policies level, but also at the Union level.

I was obviously not discounting the terrible electoral results in Greece, which impacted all European markets and the currency itself, starting overnight in Asia. This weighs dramatically on today’s opening in European Exchanges.

Yesterday, over lunch, the 3-4 times oversubscription of the BTP (French T-bills) auction at, evidently, lower rates brought confidence. Of course, these are not longer than 51 weeks though, meaning that the market doesn’t expect over-issuance by “Red François” within the coming six months. This good piece of news was again comforted by the rating agencies spraying “Hollande seems OK”. I always found funny that rating agencies can pretend to make and unmake Kings while they have been so often so late, so wrong, so tart. They Just provide an Anglo centric opinion. Nothing else.

Back to bonds; the important issues will be the long ones, and as far as I can see this morning, OATs’ (French Government bonds) yields are a couple of basis points lower than Friday, and holding well.  It’s a strong message.

Well, the Union level is going to be harder to assess: I was positively surprised by Germany’s stance: Mrs merkel’s declaration of “no recess for austerity” was very quickly softened to “Growth Yes, but no deficits allowed” and will, I guess, be softened further as we go by…The point is we may be in a situation where the “weakened” (anti austerity) countries’ negotiation power at the European Council gets heavier handed. The dangers of divide loom when the blocking minority is easily reachable if France doesn’t back Germany. I leave to my readers the verification of the vote arithmetic at the Council.

Yet, we’re not out of the woods, every movement Greece does will be followed and its ability to jeopardize the Eurozone’s stability is a reality. Solutions will be sought while Volatility remains. Selling out of the money put options on volatile assets makes sense then.


From → Markets view

  1. Christian permalink

    Watch out here. While the rally yesterday was strong, the S&P500 chart, Dax, SMI etc. look weak. In fact, the S&P500 chart looks very closely identical to that of early October 1987. History doesn’t repeat itself, it stutters. The trends have turned negative nonethless.

    • Thanks for the warning Chris. That is why I like corporate bonds, value shares and selling put options on them. If it tanks, there is a level at which I wouldn’t mind being delivered those shares. If on top, I am paid a premium, I’m happy.

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