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Analysts Pour Cold Water On Europe
The market is starting the week on a positive note, at least on the Euro crisis front, as sovereign yields drop thanks to a report about the ECB engaging in yield caps.
But analysts are skeptical that the Euro crisis has really turned the corner.
Here’s Morgan Stanley’s Joachim Fels:
Right now, I spend much time doubting that the euro area’s problems are somehow solved just because Mario Draghi indicated that the ECB may buy short-dated Spanish and/or Italian bonds once these governments subject themselves to an EFSF/ESM programme. Yet, this is what ebullient markets seem to be suggesting. I think these measures will at best buy some more time to address the underlying deficiencies of the euro’s institutional set-up – the lack of banking union, the lack
of fiscal union, and the lack of a central bank that is mandated and willing to serve as a true, unconditional lender of last resort for governments.
There was some news on the banking union plans this past week, when an EU Commission spokesman said the Commission will propose that the ECB will be given responsibility for supervision of all banks, not only the largest ones. The full set of proposals will be discussed at the ‘informal Ecofin’ in Nicosia on 14-15 September. Yet, an ECB as lender of last resort for governments remains anathema in Germany and the stalemate on fiscal union between France and Germany remains in place. This Thursday’s dinner between Angela Merkel and Francois Hollande is unlikely to produce any news on fiscal union. Rather, look for a repeat of the ‘we’ll-do-everything-to-preserve-the-euro-and-so-will- the-ECB-which-is-of-course-independent’ theme.
And here’s George Goncalves of Nomura:
With the Olympics over and US, UK, and EU vacations soon coming to an end, something tells us that it is worth remaining skeptical of the latest risk rally and core bond market sell-off. The media reports make it seem that something big is coming and it better be as there is a ton of EU-related events in the coming weeks, where there needs to be flawless execution based on what is priced into markets already. It is true that we welcome this normalization in rates, but we think there will need to be another scare for the Europeans to coalesce around a major QE-like program. That fear, shock and subsequent strong policymaker response that would follow should make for a more opportune time to go short USTs.