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Asian stock markets closed mostly higher, and thus far today European indices are printing unanimously and appropriately in the green in the opening hours, as are commodities and risk currencies ( by ‘risk’ currency forex, traders refer to a currency that usually rises with stocks and other risk assets, the label has no connection to their stability).
The optimism is dangerously premature, primarily because the EU is making the same mistake it did throughout much of the Greek crisis earlier this year – it is failing to address concerns about continued speculative attacks on other weak EU sovereign bonds and the banks that may hold them. Here’s a full list of why we urge caution:
  • Nothing new revealed: Other than that Ireland has officially requested aid. So far key points released are just what was already the consensus beliefs--that Ireland has agreed to accept aid (surprise! – not!), range is likely under 100 bln EUR, Ireland gets to keep its low corporate tax rate but will make more spending cuts.
  • No Reference To Back Other PIIGS: The most glaring omission thus far is on how the EU will try to prevent shorting of other PIIGS debt like bonds of Portugal or Spain, which was the REAL threat that made a solution for Ireland urgent. Ireland was funded into next year anyway, but other EU weaklings were seeing bond rates soar out of range. Preventing THIS is the issue that needs to be addressed for longer term EU stability. Granted, easier said than done. NB: The piecemeal, to-little-to-late approach to Greece was EXACTLY the mistake the EU made with Greece in early 2010. Then too they ignored concerns about speculative attacks on other PIIGS which could be just as dangerous. Remember, all it takes is one default to send borrowing rates for the other PIIGS soaring and risk the dreaded domino effect as one default sparks higher rates (or utter lending freeze) for both the other PIIGS and all banks suspected of heavy exposure to them, causing further failures, etc.
  • Portugal Is Vulnerable: As Marc Chandler of Brown Bros. Harriman notes here:

Portugal is uncompetitive and has a huge stock of private debt. Public debt is "only" 86% of GDP, but private debt is nearer 240%, which is among highest in the world. Portugal's productivity is two-thirds the euro zone average. The IMF expects Portugal's economy to contract almost 1.5% next year and the government seeks to tighten fiscal policy 4%.

  • The Pain From Spain: Its bond rates are far lower than Ireland’s though its situation is not appreciably better, making it vulnerable too. Its very substantial regional and local debt is not widely reported or discussed, so see Edward Hugh’s Is a 6% 2011 Deficit Realistic for Spain? for details as well as many of his other excellent pieces. Unlike Greece, Ireland, and Portugal, it is considered too big to bail out, making it the likely last stand for the EU as we know it.
Technical Resistance: As we noted the other day in Weekly Market Movers Nov 22nd To 26th: EU Crisis Anniversary Issue From Dubai To Dublin , risk appetite as depicted by the S&P 500 is near significant long term resistance, which makes it especially prone to pullbacks from profit taking on even mild disappointments.
When You Can Get Optimistic
If there is actual official news and confirmation that the EU has a plan in place to discourage speculative attacks on other PIIGS debt, AND we get sufficient and satisfying details about Ireland’s stabilization, THEN it will be much safer to start going long on risk assets.
Remember, however, that one way or another, aid packages mean more euros are getting printed, and that could weigh on the EUR after an initial celebratory bounce.
DISCLOSURE & DISCLAIMER: AUTHOR IS SHORT THE EUR FOR HIS PERSONAL PORTFOLIO, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER
Source: Ireland Bailout Cheer Is Dangerously Premature. Here's How to Play Markets Accordingly