July 2010
MARKETS FLASH / July 2010
The peripheral European countries situation ///
Fixed Income Management Department
Market performance (as of July 9, 2010) As of
09/07/2010
01/07/2010
10/05/2010
03/05/2010
2Y government bonds
09/07/2010
01/07/2010
10/05/2010
03/05/2010
10Y government bonds
Germany
0.77
0.68
0.60
0.81
Germany
2.63
2.57
2.92
3.07
France
0.97
0.95
0.75
0.96
France
2.96
3.00
3.21
3.33
Portugal
3.14
3.33
2.95
3.66
Portugal
5.38
5.58
6.13
5.14
Italy
1.83
2.08
1.57
1.66
Italy
4.02
4.08
4.18
4.00
Ireland
2.29
2.65
1.59
2.85
Ireland
5.25
5.47
5.91
5.11
Greece
10.27
10.28
12.38
8.50
4.69
4.58
4.53
4.04
1078.0
1027.4
1159.7
1202.3
25.0
32.9
28.8
20.2
117.8
130.7
101.1
87.2
Greece
9.69
9.78
7.53
10.28
Spain
2.70
2.97
1.94
1.97
Currencies and emerging market index
Spain Equities and Credit
€/$
1.26
1.25
1.28
1.32
S&P 500
€ / CHF
1.34
1.33
1.42
1.43
VIX
314.00
339.00
291.00
255.00
EMBI
Itraxx Main
Market background (as of July 12, 2010) •
Improvement on the sovereign debt market: the concern over sovereign risk seems to be fading: risk aversion is generally falling – investors have been reassured by the gradual improvement on the interbank market, following the positive outcome of the ECB’s refinancing operations. At the same time, the removal of Greek securities from certain bond indices took place without putting much pressure on spreads. volatility and pressure on the spreads of peripheral countries have stabilized, thanks to support from the ECB buyback program.
•
Emergence of new fears on the markets: thus, while the concern over sovereign debt has receded for the short term, the markets are now focusing on two new themes: bank risk and the risk of a double-dip recession. bank risk: fears have shifted from sovereign risk to the risks related to banks in the countries concerned. The results of stress tests (due on July 23) and the corporate reporting season (from July 12) will therefore come under close scrutiny. If any bank in a euro-zone country is found to have refinancing problems, this will engender fears for the euro-zone's financial system as a whole.
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MARKETS FLASH / July 2010
fears of a double-dip recession in the US – disappointing US economic indicators have altered the priorities of the markets, which are now factoring in the risk of a deeper recession. While this is debatable in the short term, the uncertainty weighing on the economic recovery is likely to increase risk aversion.
Management conclusions •
Greece: we maintain our overexposure to short maturities (1-2 years), which offer attractive carry and repayment guarantees. We are neutral in relation to our indices on longer maturities. Central bank purchases have enabled certain investors (insurers, asset managers) to reduce their positions and stabilize their yield levels. Nonetheless, the volume of these transactions (central bank buybacks, investor sell-offs) is falling from week to week, and activity on peripheral debt is currently pretty weak, with liquidity weaker still. Moreover, with Greece no longer needing to obtain finance on the bond market, there is no activity on the primary market and very little on the secondary market.
•
Regarding the other peripheral countries, we prefer to maintain our underexposure to Portugal, which is still under the threat of a rating downgrade. Meanwhile, recent announcements have led us to return to neutrality on Spain for maturities under 7 years, while maintaining underexposure to long maturities. We have also increased our exposure to Ireland on short maturities, while maintaining neutrality on maturities above two years. Yields on Irish bonds are stabilizing thanks to the purchases by the ECB.
Written on July 12, 2010, by the Fixed Income Management Department of Natixis Asset Management
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