Greeks know how to time an issue

Outlook

The success of the Greek auction this morning—demand of €20 billion for €3 billion on offer and from 550 accounts—tells us that the Greeks know how to time an issue. It also tells us that investors prefer sentiment arising from perception of central bank policy over actual economic data. Greece could not have done it if the ECB were not seen as seriously considering QE and other stimulus. If instead rates were on the rise, the yield would have to be much higher, deflation notwithstanding. And that’s with the dovish ECB stance built entirely on Mr. Draghi’s hot air and no real action at all. Mr. Draghi’s hot air is worth a lot more than any other central banker’s hot air—after the success of “whatever it takes”--but it’s still hot air.

It’s also the triumph of hope over experience. Greek deflation is worsening, with CPI down to -1.3% y/y in March (from -1.1%) and unemployment fractionally better at 26.7% in Jan from 27.2% in Dec but still near 27%. 27%! The economy may have stopped falling but it can hardly be described as “good,” which is also true in Spain and even more so in Italy, where no real progress has been made at all. How can economies sporting unemployment of 20-30% (and more for youth unemployment) manage to get yields even remotely competitive with the UK and US? By selling the “magic euro” story, over and over again.

The euro is magic because the ECB is credible—no inflation, ever. This is the gold standard for international investors. Never mind that politics are crumbling into the old extreme left and extreme right factions of the 1980’s—nobody wants to remember the Red Brigades. Gideon Rachman in the FT reminds us that “The European parliamentary elections in May are likely to yield quite shocking results – with the rise of far-right and far-left parties in core countries, such as France. This could be destabilising, to put it mildly.”

The newfound love for European assets is due in part to factors like European banks needing to sell assets to raise capital and therefore bargain-hunting, but it also has a very large component of irrationality. The lack of perspective in the pricing shows that. This is not to say any crashes are imminent, just that when you see a bubble forming, you have been warned.

On another matter, the dollar/yen is behaving in a very strange way and it’s hard to know whether any of it is due to loss of confidence in Abenomics--or the carry trade. After hitting a low of 101/52 on Tuesday, the dollar/yen wobbled up to a high of 102.14 late yesterday, but then slipped back below the previous low to 101.38 after Europe came in. The hourly chart shows complete lack of decisiveness. Since we normally see the dollar/yen falling when risk aversion is on the rise, the action over the past few days “should” imply that the full-steam-ahead risk lovers might be missing something. The correlation of the yen with risk appetite is wonky—sometimes it works and sometimes it gets overshadowed by other things. The Nikkei is dead flat, so that’s no help. We don’t buy the idea that the yen is a proxy for the renminbi—that would be the S. Korean won, probably—but if it is, the implication is that the renminbi should be back on the rise, and the PBOC should let it go.

Meanwhile, on the longer-term chart we see the dollar’s upmove resuming at any minute as the support trendline is being neared—the previous low was 101.21 (03/14) and before that, 100.76 (02/04). Whenever we get near 100, we have to worry about the BoJ. So, the question is whether support will hold. It should, since the Fed may be dovish but tapering remains on schedule, to bring it down to the lowest common denominator. Bottom line, we don’t know what message to read into the yen, but there’s something there. Whenever we get range-trading in a narrow range near a critical support level, we can expect a breakout. We think it should be in favor of the dollar but if it goes the way other, what will it mean?