Research for Online Investors
Eurozone Finance Ministers are meeting this
morning in Brussels to finalize the Greek bail-out deal. The “new” Greek
bonds started trading on the secondary market this morning. The shortest
maturity, at eleven years, were priced to yield 19% while the thirty-year issues were yielding
14%. Normally, longer term bonds yield a higher interest rate than
shorter term bonds. When this natural condition reverses it is
called an “inverted” yield curve. The bond market is pricing in
another potential Greek default.
Portugal’s ten-year bonds are yielding 13.71% this
morning as bond vigilantes look for the next victim. Bloomberg reports that Spanish and Italian yields have dropped below 5% The ECB evidently bought short-dated Portuguese bonds on February 29 to stop the
climb in interest rates. Portugal’s debt is rated as ‘junk’ by
Moody’s, Fitch and Standard & Poor’s.
Portugal ran a 4% budget deficit to the country’s
annual GDP in 2011. The government is cutting spending and raising taxes
as part of the agreement made last year to receive $102 billion dollars in bailout money from the European
Financial Stability Facility (EFSF) and the International Monetary Fund. Forbes reports that Portugal’s sovereign debt is about 110% of GDP. The problem is the country’s GDP is shrinking under the austerity
measures. Portuguese GDP was down 1.1% last year and is expected to
continue lower by 3.7% this year. This year’s primary deficit is
about 6% of GDP.
Forbes quotes an Barclay’s analyst’s opinion
surmising that “If the Portuguese government continues to implement the programme satisfactorily, even if the
fiscal and growth performance are weaker than expected, core eurozone countries will likely find it easier to
explain continued support for Portugal domestic constituencies.”
In other words, the eurozone will support Portugal
as long as they continue to live up to their agreements. The ECB will
continue to take Portuguese bonds as collateral for LTRO loans. Private
investors should be wary of Portuguese sovereign debt, but the eurozone and IMF will keep the country afloat until
they can re-enter the public credit markets.
China threw the markets a curve this morning when
they reported a trade deficit for February of $31.5 billion dollars.
This is the largest trade deficit in 22 years. CNBC reports that imports
increased 39.6% over last year while exports in February grew at an 18.4% rate. China’s official Purchasing Manager’s Index (PMI) rose to 51.0 from 50.5 in
Sun Junwei, China Economist at HSBC, believes
Chinese exports will continue to show weakness because of “mild recessions” in European economies and weak demand
in the U.S. for Chinese products. He told CNBC “Net exports will likely become a drag on GDP growth in the first
quarter.” Some traders see the silver lining in the trade deficit
numbers in that it will allow Chinese authorities to weaken the yuan and loosen
The market seems confused this
morning. The Greek credit crisis is out of the headlines…what to
do? We think the market is primed to move higher. We have thrashed around 1370 on the S&P and 13,000 on the DJI for the
last two weeks. The Federal Reserve is meeting this
week. Inevitably, there will be some volatility around the FOMC
statement after lunch tomorrow. Everybody wants more
QE. We don’t see it at this point, so there will be disappointment
from traders. If we don’t get bad news to hurt the market, we
believe we will see new highs in the next week or two.
The information presented in this newsletter is based on generally available news releases, corporate filings,
current events, interviews and the editor’s opinions. It may contain
errors and you should not make investment decisions based solely on what you believe you have read
here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your
grandmothers! The editor may or may not have a position in any
securities discussed. The editor may have held a position in a
security earlier, or in the future.
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