June 2010
MARKETS FLASH / June 2010
The PIIGS situation ///
Fixed Income Management Department
Market trends (as of June 8, 2010) Data as of
08/06/2010
01/06/2010
10/05/2010
03/05/2010
2-year government rates
08/06/2010
01/06/2010
10/05/2010
03/05/2010 3.07
10-year government rates
Germany
0.46
0.50
0.60
0.81
Germany
2.51
2.68
2.92
France
0.80
0.71
0.75
0.96
France
3.07
2.96
3.21
3.33
Portugal
3.24
2.74
2.95
3.66
Portugal
5.23
4.79
6.13
5.14
Italy
2.22
2.04
1.57
1.66
Italy
4.29
4.17
4.18
4.00
Ireland
2.50
2.24
1.59
2.85
Ireland
5.10
4.91
5.91
5.11
Greece
7.54
7.43
7.53
10.28
Spain
2.92
2.57
1.94
1.97
€/$
1.20
1.22
1.28
1.32
S&P 500
€ / CHF
1.38
1.41
1.42
1.43
VIX
334.00
327.00
291.00
255.00
Currencies and Emerging
EMBI
Greece
8.12
7.85
12.38
8.50
Spain
4.59
4.33
4.53
4.04
1062.00
1070.71
1159.73
1202.26
33.70
35.54
28.84
20.19
139.22
122.56
101.09
87.20
Equities and Credit
Itraxx Main
Market conditions (as of June 8, 2010) •
New perceptions of country risk: risk perception went from the impact of a high deficit on public finances to the impact of the deficit on the country's growth. Liquidity risk in the short term trending into likely stability in the medium term. Countries are nevertheless continuing to enact strong fiscal reforms.
•
New dichotomy between countries: German bonds outperform all other eurozone AAA debt and revaluation of country risk for the core countries. Peripheral spreads remain broadly stable, supported by ECB purchases.
•
ECB purchases: a deliberately very opaque procedure. The value of public debt purchases is gradually decreasing (1st week: €16.5 billion; 2nd: €10 billion; 3rd: €8.5 billion; 4th: €5.5 billion), with purchases concentrated primarily on Greece, Portugal and Ireland.
•
Spread to other asset classes: the crisis in the eurozone has spread to credit and equities, which suffer notably from the exposure of financial institutions to country risk.
•
High risk aversion: extreme volatility in the markets, with a “flight to quality” and investors looking for safe havens.
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MARKETS FLASH / June 2010
•
Movement in foreign exchange rates: rapid devaluation of the euro, to close to its equilibrium value (around USD 1.16).
News (as of June 8, 2010) •
Finalization of the creation of the European Stability Fund: – €440 billion to help troubled countries in the eurozone, – the fund is expected to be added to by the EU and the IMF, to reach a total of €750 billion, – funds available through June 30, 2013, in the form of loans guaranteed by the 16 countries in the eurozone.
Management conclusions •
Greece: for several months, our scenario has emphasized the survival of the eurozone, as manifest in the financial support supplied to Greece by other eurozone countries, and as confirmed by the latest news (creation of the stability fund). We favored the purchase of Greek securities with short maturities (1-2 years) which provided an interesting carry opportunity and financial guarantees of repayment. Central bank purchases have completely stabilized rate levels: 7.5% for 2-year Greeks. On the longer maturities, we took advantage of central bank participation to adjust our portfolio and return to neutrality with respect to our benchmarks, as we were overexposed on the 3-5 year maturities.
•
With regard to the other peripheral countries, we prefer to remain underexposed to Portugal, which still faces the threat of a rating downgrade. At the same time, the new announcements have induced us to return to our neutral position on Spain for maturities of less than 7 years, while remaining underexposed on long maturities. Similarly, we increased our exposure to short Irish maturities by remaining neutral on maturities over 2 years. Yields in Ireland are stabilizing, thanks to ECB purchases.
Written at 12:00 p.m on 09.06.2010, by the Fixed Income Management Department of Natixis Asset Management
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