The Countdown Begins and the Markets Are Ready to Exhale
European regulators have their finger on the trigger.
It's beginning to feel a bit like Madness. With the last month of the quarter heating up and the Ides of March approaching, there's a ton to chew through. I'm not talking about the high noon showdown between Syracuse and Georgetown -- and no, I'm not going to The Garden, if that's any indication of my commitment -- I'm talking global markets, two-sided risk and an increasingly unsure world.
PIMCO co-CIO Mohammed A. El-Erian, widely respected as a sharp cookie, wrote an Op-Ed in the FT offering that deteriorating public finances may affect the global economy more than most (outside of the 'Ville) currently realize. "The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood....and is being viewed primarily--and excessively--through the narrow prism of Greece."
Ironically--or perhaps coincidentally--the next story I read on Bloomberg offered that the crackdown of naked swaps in Europe will ring hollow without stateside sponsorship. European regulators could initiate a continent-wide ban on speculative trading of sovereign Credit Default Swaps tomorrow but it won't work without American participation in the plan.
Simon Gleeson, a financial-regulatory partner at Clifford Chance LLP in London, told Bloomberg that the European ban "could be implemented immediately" under the EU's Market Abuse Directive and while it would be challenged in court, a verdict could take up to six years. The tough talk and imminent threat of action, he said, is designed "to frighten hedge funds off the trades."
These topics should be familiar to ye faithful. We've been expecting this since we first scribed our Ten Themes of 2010. I won't list the other coverage -- although Regulatory Risk Abounds! is particularly pertinent for those looking to learn -- and a sampling can be found my Random Thoughts yesterday when I proclaimed "Crisis Averted: World Peace Breaks Out!" with my tongue stuck firmly to the side of my cheek.
On March 1st, when we offered that a Pop (through resistance at S&P 1120) before the Drop was starting to percolate as the most-likely scenario in my crowded keppe, Minyan Robert shared his fare on haphazard bans of speculative swaps. While he was speaking to Greek law in particular, his words are worth repeating as they relate to partial global policy:
"Speaking as an ex-lawyer: Greece can "declare" whatever it wants but no one will care. If a fund in London buys a CDS from a bank in New York, and the CDS contract specifies it is governed by UK or New York or Delaware law–they would be insane to specify Greek law -- the Greek government has as much power to nullify the CDS as it does to nullify gravity."
I'm starting to get that old familiar feeling, although there are number of notable differences. First, when the FSA banned short sales in the financials, State Street Bank (STT) was off 50% (yes, in a single day), Morgan Stanley (MS) was a hat size and Goldman Sachs (GS) was dabbling in double-digits. Now? Markets are 70-ish percent higher on the aggregate, and there doesn't seem to be unity on the near-term fix.
Any semblance of policy discord could have ominous implications on top of the unintended consequences so keep that right hand up as we find our way. There's no arguing against the tape trading great; we must, however, respect but not defer to the price action if we're to stay ahead of the curve.
Good luck today.
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