PAM Strategy Unit - Flash note on recent market events
| 08 August 2011 |
Be patient and proceed with cautionMarkets have set on a course which is close to our worst-case scenario when we turned cautious three months ago: inflation defying the tightening cycles in many emerging countries, including China; contagious defaults in Europe; and growth petering out in the US, all coming together at once. For the time being, we remain patient, are proceeding with extreme caution and looking for buying opportunities in the near term. |
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A global liquidity response is needed to restore risk taking
Markets are highly dysfunctional at the moment. A liquidity squeeze had been developing, on a global basis. A global liquidity response is hence needed for us to restore risk-taking. Bid/offer spreads are historically wide in instruments as liquid as German Bunds or US Treasuries. The market’s ability to absorb additional government bond supply has been impaired as banks reduce leverage and governments tighten fiscal policy in the developed world.
We think the ECB is correct to reverse its liquidity policies
The European Union’s additional rescue package for Greece reduced substantially the cost of the debt and postponed the maturity of the loans to Greece, Ireland and Portugal. It also increased the size of the EFSF and enhanced its capability to buy sovereign debt in the secondary market, in our view, a substantial improvement on previous attempts to contain the European sovereign debt crisis. Nevertheless it was only the ECB’s intervention by buying Italian, Spanish, Portuguese and Irish government bonds in the market that managed to turn spreads tighter relative to Germany. (...)
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