Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 18/7/11

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Markets remain difficult as we approach crunch talks in both Europe (peripheral debt crisis) and the United States (debt ceiling crisis). We have continued to see equities move lower as investors move into perceived safe havens (gold broke $1,600 an ounce for the first time today). Keep an eye on silver too – this is trading around $40 at the moment, putting the gold:silver price ratio to circa 40x, a good deal below the 47x long-term average.

 

The US debt ceiling issue remains a headache inducer at this time. With depressing predictability, US politicians continue to provide grave warnings about the deficit (which at 10% of GDP is similar to what Greece “achieved” in 2010) and the national debt, which stands at just over $14,000,000,000,000. However, most of them don’t have the courage to do anything to significantly improve the fiscal position, so I expect that after more grandstanding an eleventh hour deal to raise the ceiling will be cut, thus postponing the eventual US fiscal meltdown. So just like Europe, America’s leaders like kicking the can down the road, and on this note they will likely be attracted by this suggestion from Moody’s. For more on the US debt ceiling, check out Gluskin Sheff’s David Rosenberg here.

 

Speaking of debts, here’s Ireland’s National Debt ClockWe will not regain our sovereignty so long as it continues to rise.

 

Like almost every other commentator out there, I consider the latest European bank stress tests to be an absolute joke. SocGen has a good note out on them which I’d encourage you to look at. On SocGen’s numbers, applying a 50% haircut to Irish, Portuguese and Greek government debt and a 20% haircut to Spanish and Italian debt, would increase the capital shortfall to €22bn for a subset of 40 larger quoted banks – or around 9x what the EBA calculated for the 90 European banks it surveyed. SocGen’s calculations do not appear at all unreasonable when you look at where peripheral European bonds are trading.

 

Last week I wrote about how the overall ISEQ level is irrelevant. In recent days Greencore has said that it will move its main listing to the FTSE, while DCC is considering doing the same thing. With volumes on the ISE continuing to decline this year after last year’s double-digit drop, these announcements surely come as a further blow to the top brass at the exchange.

 

So, where next for markets? My hunch is that if the EU summit kicks the can hard enough to give the bloc some breathing space and the US okays a debt ceiling increase then a short-term relief rally follows. However, I would emphasise the words “short-term”, seeing as neither of these “best case” (at this point in time, given the political appetite out there) out-turns would address the structural problems faced by the leading developed countries. Aside from the opportunistic nibble at the market (one Irish name in particular has tempted me today, but not quite enough for me to buy it yet), I remain in “take profits” mode, not that many of my current positions are at levels that I’d be happy selling at!

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Written by Philip O'Sullivan

July 18, 2011 at 2:29 pm

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