The question isn't what happened in Europe, it's why are people surprised? The bullish bandwagon has dismissed the myriad market risks. But they are all still hanging out there waiting to pop. The market is way overextended and due for a pullback. This is just the excuse to start that pullback.
Twin crises in Italy and Spain stalk markets as political unrest prevails
The escalating political crises in Italy and Spain are being watched with growing concern by bond investors, fearful that both countries could slide into paralysis and lose the crucial backing of the European Central Bank.
Ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections. Photo: Luca Bruno/AP By Ambrose Evans-Pritchard
6:32PM GMT 03 Feb 2013
“Markets have been extraordinarily complacent,” said sovereign debt strategist Nicholas Spiro. “The prospects of a stable and reform-minded government in Italy are very slim. We think a nasty surprise is coming.”
In Italy, ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections, surging back into contention with vows to rip up “German-imposed” austerity policies and cancel a hated property tax.
His Right-wing alliance has risen to 28pc in the polls, relishing a widening scandal at Banca Monte dei Paschi that has embroiled the Italian left.
“Austerity in countries already in crisis pushes them into a very dangerous recessionary spiral. These policies have left 50m Europeans unemployed or short of work. We need to get rough with Germany, otherwise reality will force a number of countries to leave the euro,” he said.
Anti-euro comedian Beppe Grillo has climbed to 18pc, though he may have gone a step too far by inviting al-Qaeda to blow up Italy’s parliament. “We’ll give them the co-ordinates,” he said. A hung parliament is now likely, with eurosceptics between them controlling the senate.
Gary Jenkins from Swordfish said the political ructions are disrupting eurozone crisis strategy since the ECB’s pledge to back-stop Club Med debt is conditional on countries sticking to the EU austerity agenda. “If this gets worse, the ECB is going to be in a very difficult position. It can’t back a country if nobody is running it.”
It is far from clear whether ECB’s hawks such as Germany’s Jorg Asmussen will continue to back an open-ended pledge of intervention if countries start backsliding, or how the German, Dutch, and Finnish parliaments would react if asked to vote on a formal rescue.
A parallel crisis is under way in Spain where the slush fund scandal of Mariano Rajoy’s Partido Popular has inflicted serious damage on the government’s moral credibility.
Mr Rajoy has denied allegations of kick-backs from construction firms, but has yet to clarify leaked documents from a former party treasurer that appear incriminating. “I have never received or shared out illegal payments. These allegations are coming from people who have something to gain,” he said.
Polls show that 60pc of his own supporters do not believe the official explanation. A national petition drive calling for his resignation has already collected almost 800,000 signatures. Socialist opposition leader Alfredo Pérez Rubalcaba yesterday joined the chorus calling for Mr Rajoy’s head, saying the country had become “ungovernable”.
El Confidencial warned that democracy itself is under assault, with “every institution of the state under suspicion”. The scandal further reduces hopes of heading off Catalonia’s independence drive.
Mr Spiro said the great question is whether a government under siege can enforce further “savage austerity” on a country already five years into depression, with unemployment above 26pc.
US yields all over the place in the past two days. I only wish I reloaded on the portion of the long position in Fed Funds I sold into the strength on Fri at the close. Halfway to target for restablishing the short for the final crash. Based on how Europe closed we should get quite the spike in the Asian trade tonight.
Yup, and coupled with the fact that the market is long overdue and last Friday really looked like a blowoff-top. A lot of people took last Friday as an opportunity to sell, could tell by EOD activity. We'll correct back to 1460ish I think. I'll start buying again under 1470, tech will lead the way this time.