The European Crisis is ending…on an upswing
Yesterday Slovakia voted ‘No’ to the expansion of the ESFS and while we know they will re-vote and pass it…something VERY interesting happened.
Instead of the big market slump in Europe that so many people were predicting (some of course were predicting a crash) the key European markets (STOXX and DAX) went up…in a big way. Right from the opening bell it was a rally.
Business news services were scrambling to think of reasons why this might be happening. Many ideas were floated: Slovakia already said they would re-vote and say ‘yes’, markets are waiting for the next France-Germany announcement in November, etc.
I would like to offer a different explanation, one that reeks of both heresy and thought provoking depth.
The ‘hot money’, the big foreign investors (hedge funds, institutions and large scale pensions) that were lobbying insults at European leaders and claiming that Europe needs to break apart and the Euro was an utter failure…have done their worst. They did not get their way and so they left. See, all that ‘hot money’ is already long gone from Europe.
Why are the markets rallying in a week of bad news? Because the foreign investors really cannot ‘punish’ the Euro markets any more. They took their ball and went home, so all they can do is piss and moan from the sidelines.
Think about it:
1) The key investors pulled out of funding EC banks several months ago. The ECB then stepped into to offer unlimited inter-bank lending and dollar repurchasing upon request.
2) Foreign investors spiked the government bond markets over the summer driving Greece to absurdity and then launched a coordinated attack on Italy and Spain. Again the ECB was forced to step in and repurchase bonds and then offset (sterilise) the purchases.
3) From July to late August the DAX (the big German exchange) dropped over 2,000 points (!) as foreign investors sold every European bank and industrial firm they were holding.
4) CDS spreads (credit default swaps) blew out on huge bets that the Euro would crash, Greece or Italy would default, etc. The short sellers loaded up on shorts to the point were all the major exchanges simply banned short selling for the rest of 2011.
All that sound, all that fury. All gone…
Well timed ECB intervention has kept the worst at bay. I suspect the politicians simply waited the storms out and applied selective treatment where needed.
Don’t believe me? Then please think about these points:
For the last 2 months the bond market has been calm, Greece is on schedule for the next aid tranche and the DAX has gained close to 1,000 points in 2 WEEKS as people snap up the bargain blue chips left on the floor during the stampede.
Slovakia ‘No’ vote and even the collapse of a large European bank (Dexia) both of which happened in the last week did little to dent the business climate here.
I think the explanation is shockingly simple…that locals and local investors are the only ones left in European markets.
They can see that the needed work is being done and they are voting with their Euros through buying under priced equities and assets. Some internationals are coming back of course but mostly the savvy value investors. The low key types who are hunting for a good return.
The screaming headlines in the Anglo press still promise imminent doom but the current climate is proving this false.
I think the Eurocrats won and I am glad they did, the rebuilding will be slow and for many quite difficult but now that the storm is passing we can get to work building the kind of Europe that will be better positioned between the east and the west.
The ‘hot money’ will come back of course and once again try to tell everyone what to do. Hopefully we will remember then that with hot money comes mostly hot air.
October 20th, 2011 at 8:44 pm
Nothing like a little proof positive that what was said in this article about foreign ‘hot money’ having been pulled out of Europe was spot-on.
http://www.bloomberg.com/news/2011-10-20/european-stocks-unattractive-until-crisis-solved-blackrock-says.html
BlackRock the investment heavy weight told Bloomberg today that investment in Europe is wait and see do to the continuing uncertainty.
When the money comes back the market is going to inflate rapidly. This will bring new and different problems unfortunately…
October 24th, 2011 at 9:13 am
More verification that many foreign investors have already left Europe.
Scott Mather, head of global portfolio management at Pacific Investment Management Co., which oversees the world’s largest bond fund, told reporters in Sydney today; Pimco is “for the most part uninvested” in Portugal, Ireland and Greece, and “underweight” Italian and Spanish bonds, while having at times “taken advantage of some opportunities there,” Mather said.
BlackRock and PIMCO are the two largest funds out there and both have now admitted to being all but out of Europe at the moment.
Go right ahead EU leaders, fix the problem your way, all the hot money has already left and can do little but carp from the sidelines.
Of note: some of the money is already coming back though on the idea that October 26th - 27th creates some kind of milestone. We are seeing a mini version of the coming inflation occurring in EU indices already.