By Nick Kalivas
Mon 07 May 2012 09:50:45 CT
The election results in Greece, France, and Germany were generally in line with expectations, and have led to limited price change in treasuries after a knee jerk overnight rally. None-the-less, the market has a number of issues to digest in the coming weeks. A few items to think about include: 1) The next major summit in Europe is set for late June. Between now and then, the market will be watching the shape of economic policy and political rhetoric. Greece is much less likely to get IMF aid, France will have to be careful not to completely alienate Germany post Hollande's victory, and Merkel has to deal with what appears to be a loss of regional support. 2) The "end" of EZ austerity does not necessarily mean Europe will see vibrant economic growth. Europe (the U.S. too) needs a radical shake up of policy to drive consumer and business spending and the bolstering of income growth. The answers probably do not rest in socialist economic policies which Hollande and Greek election results seem to represent. 3) There will be questions over the ability of some countries to finance themselves - without IMF aid, how will Greece pay the bills? 4) There will be pressure on politicians to expand the ECB's mandate to include growth. How will this come about? Will it come about? 5) The market will have to think about the chance that the end of austerity will lead to greater bond issuance in Europe -- who will buy it? Moreover, sovereign credit ratings could come down in many areas Europe. 6) The make up of the euro currency and the unity of the EZ will be tested. Euro skeptics have usually bet that the euro could not handle a major crisis and it could be facing a crisis due to recession. 7) What are the implications for the U.S. election? It is clear that incumbents are not popular, but there is also a backlash to austerity. One conclusion could be reduced risk taking and position sizes as traders try to sort through the EZ political landscape and implications.
Treasuries continue to face a situation were valuation is poor due to a low real interest rates and high U.S. deficits, but the Fed's twist and slow growth are working to provide offset. Yields have rallied into the refunding which may make it more difficult for buyers to stomach taking down new supply. 143-18 and 143-06 are points of downside interest in the June bond contract. 144-19 and 144-23 are points of interest on the upside.
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