Date: Friday 22 Jun 2012
-PIMCO´s Gross warns against risk assets
-Goldman Sachs recommends going short S&P 500
-IMF says Spain aid plan flawed –WSJ
-Juncker says Spain aid through EFSF and then ESM
Stoxx 600: -0.69%
European equities have begun the day lower, dragged down by losses on Wall Street overnight. That against a background of sparing between Eurozone leaders, as is perhaps to be expected, before next week´s EU summit. Investors are hoping that they will be able to more fully thrash out a definitive solution for the periphery´s problems.
If not, however, then markets may be in for a rough-ride as financial tensions build and drag on world growth. As well-known bond fund manager Bill Gross Gross, who manages $261bn for the Pimco Total Return Fund, said in a Twitter post, risk markets are vulnerable as the “monetary bag of tricks empties.”
In a similar vein, at least for the very short-run, Goldman Sachs yesterday issued a note recommending that clients go “short” (sell) the S&P 500 with a target to 1,285 points, or around 5% below current levels. That, by the way, is thought by some to have contributed to yesterday´s selling.
As far as the most important “domino” in the Eurozone periphery at the moment –Spain- is concerned, bond investors yesterday seemed to give a lukewarm welcome to the country´s audit of its financial system. For one, Madrid seems to be concentrating on the least adverse of the scenarios contemplated in those audits, some say. Furthermore, other observers point out that the audit does not take into account the possible short-term losses on the Spanish government bonds held by the banks.
What is needed? For analysts at Barclays, “it is clear that the situation in Spain will remain unsettled for the near future. Some reactivation of secondary market purchases, coupled with further ECB actions (a rate cut of 50bp on July 5 and collateral easing), along with fundamental progress at the June 28-29 meeting, is essential for the unstable equilibrium not to deteriorate further or for some long-lasting improvement in Spanish bonds, in our view.”
In any case, economic authorities do seem to be keenly aware of the risks. In this regard, Italian Prime Minister Mario Monti told the Guardian on Friday that individual Eurozone countries will come under "escalating speculative attacks" unless a lasting solution to Europe´s crisis is found at next week's EU summit.
Likewise, the head of the International Monetary Fund yesterday stressed the need to break the vicious circle between bank and sovereign debt.
On a positive note, the President of the Eurogroup, Jean Claude Juncker, has reportedly said that Spanish aid will be funneled through the ESM, thus avoiding the subordination of Spain´s sovereign debt. However, that will only be the case until the ESM comes into force. For some analysts that could be a costly mistake.
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