Is the end nigh for the Euro? [vol. 3]
Discussion
DeejRC said:
It isn’t a fun scenario.
The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold.
To an extent I'd agree there is something 'beggar thy neighbour' about this sledgehammer approach.The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold. On the other hand, it presents some solace to European exporters.
DeejRC said:
It isn’t a fun scenario.
The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get fked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold.
I’ve just set EUR pricing for product for January delivery. I’m modelling at 1.17 FWIW. For me the key issue is EUR:USD linkage. My ideal scenario is EUR strengthening against USD and weakening against GBP The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold. 
Southern Europeans are far wealthier now than when they first joined the EU though and the economies of those countries have grown. The "Germany big smoke, Southern Europeans backwards" argument only partially explains the debt disparity within Europe. Pension spending is out of control in Southern Europe, pensioners are basically holding society to ransom using the political system. Increasingly young people, the ones paying the oppressive taxes to pedal the Ponzi a bit further, are leaving.
Frankly they are demographically painting themselves further into a corner with debt. The ECB handing them another tin of paint won't actually solve the issue.
Frankly they are demographically painting themselves further into a corner with debt. The ECB handing them another tin of paint won't actually solve the issue.
Edited by speedy_thrills on Thursday 16th June 17:48
skwdenyer said:
DeejRC said:
It isn’t a fun scenario.
The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get fked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold.
I’ve just set EUR pricing for product for January delivery. I’m modelling at 1.17 FWIW. For me the key issue is EUR:USD linkage. My ideal scenario is EUR strengthening against USD and weakening against GBP The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold. jsf said:
The rich (Germany) has built it's economy on the basis of having an undervalued currency to help drive exports and generate a huge surplus, this is achieved by exploiting the poor (southern Europe) who have to function with an over valued currency which has killed their competitiveness, whilst remaining within a strict deficit target (austerity).
There is a reason why Italy has been in intensive care for 2 decades, and it's not because they are lazy or are not open to change, their currency doesn't suit their economy. You cant have the same currency for such a diverse group of economies with different needs, without accepting the rich have to pay for their advantages from this system by transferring money to the poorer regions impacted by that model.
It's unsustainable without large fiscal transfers and full financial integration for the entire Eurozone.
That should have been the outcome of 2008, but the Germans wont accept they are profiting from this system, so wont agree to fiscal union and all that entails.
The only thing that changed in 2010 was Draghi saying he would underwrite the bonds, that's unravelling again. They have literally thrown the kitchen sink at a poorly designed currency which was all about politics and not about the best solution for the economies involved.
This pretty much sums up my long run view of the euro. It can’t work.There is a reason why Italy has been in intensive care for 2 decades, and it's not because they are lazy or are not open to change, their currency doesn't suit their economy. You cant have the same currency for such a diverse group of economies with different needs, without accepting the rich have to pay for their advantages from this system by transferring money to the poorer regions impacted by that model.
It's unsustainable without large fiscal transfers and full financial integration for the entire Eurozone.
That should have been the outcome of 2008, but the Germans wont accept they are profiting from this system, so wont agree to fiscal union and all that entails.
The only thing that changed in 2010 was Draghi saying he would underwrite the bonds, that's unravelling again. They have literally thrown the kitchen sink at a poorly designed currency which was all about politics and not about the best solution for the economies involved.
It can’t work structurally as it is. We know that from 2012 and nothing structurally has changed since then. There has to be some fairly serious changes in the systemic structure of the currency for it to exist in the medium to long term. It is in nobody’s interest for the Euro or the Eurozone to implode.
DeejRC said:
It can’t work structurally as it is. We know that from 2012 and nothing structurally has changed since then. There has to be some fairly serious changes in the systemic structure of the currency for it to exist in the medium to long term. It is in nobody’s interest for the Euro or the Eurozone to implode.
Agreed…but will the German public be willing to mutualise other country’s debts?jsf said:
Mr Whippy said:
It’s a macrocosm of rich and poor in a country, and the wealthy being abused to pay for the poor who won’t change their ways.
The wealthy leave.
The Euro is now Germany.
The rich (Germany) has built it's economy on the basis of having an undervalued currency to help drive exports and generate a huge surplus, this is achieved by exploiting the poor (southern Europe) who have to function with an over valued currency which has killed their competitiveness, whilst remaining within a strict deficit target (austerity). The wealthy leave.
The Euro is now Germany.
There is a reason why Italy has been in intensive care for 2 decades, and it's not because they are lazy or are not open to change, their currency doesn't suit their economy. You cant have the same currency for such a diverse group of economies with different needs, without accepting the rich have to pay for their advantages from this system by transferring money to the poorer regions impacted by that model.
It's unsustainable without large fiscal transfers and full financial integration for the entire Eurozone.
That should have been the outcome of 2008, but the Germans wont accept they are profiting from this system, so wont agree to fiscal union and all that entails.
The only thing that changed in 2010 was Draghi saying he would underwrite the bonds, that's unravelling again. They have literally thrown the kitchen sink at a poorly designed currency which was all about politics and not about the best solution for the economies involved.
I also recall at the time Draghi was head of ECB, many saying he wouldn't do anything to hurt Italy because of his interests there.
It is all a big mess... I don't think it'll ever resolve, it'll just be what mode will be the one to break it.
loafer123 said:
DeejRC said:
It can’t work structurally as it is. We know that from 2012 and nothing structurally has changed since then. There has to be some fairly serious changes in the systemic structure of the currency for it to exist in the medium to long term. It is in nobody’s interest for the Euro or the Eurozone to implode.
Agreed…but will the German public be willing to mutualise other country’s debts?DeejRC said:
skwdenyer said:
DeejRC said:
It isn’t a fun scenario.
The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get fked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold.
I’ve just set EUR pricing for product for January delivery. I’m modelling at 1.17 FWIW. For me the key issue is EUR:USD linkage. My ideal scenario is EUR strengthening against USD and weakening against GBP The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold. 6 months ago, the same forecasters were predicting close to 1:25 by the end of Q2/2022, reinforcing the basic problem with forecasts having no way of realistically predicting (to coin a phrase) “black signet” events such as Russia’s invasion of Ukraine.
I buy mostly in USD & sell mainly in GBP & EUR. Unsurprisingly, a key objective is to increase the USD component of the sales mix to reduce exposure to input cost FX volatility.
I don't subscribe, but the Telegraph are reporting this today.
https://www.telegraph.co.uk/business/2022/06/17/wo...
https://www.telegraph.co.uk/business/2022/06/17/wo...
It sounds like debt mutualisation will be the preferred program. There are several aspects that are of interest to me:
1. The number of bonds the ECB holds that can be sold is finite. That likely only gives the ECB a certain amount of headroom to conduct market operations. Also it forces the ECB into raising rates over unloading bonds or they'd be reducing the number of bonds available. The net impact will be higher ECB rates.
2. "Inflation neutrality" makes this far more complex than selling a nominal value of €X in Country A's bonds then buying €X in Country B's bonds. In trading equal weights you would be decreasing the weighted median bond yield across the Eurozone which would itself be inflationary. Consequently you'll actually need to sell more bonds than you buy.
However all that is only theoretical because it also depends on how investors behave in the real world. If yields don't rise in Country A when their bonds are sold the that will be Inflationary and vice versa.
3. If a country ever tries to leave the Euro this will create a massive mess both inside the Eurozone and for that country.
The long and short of it to me is that this does not appear to be such a simple idea to execute.
1. The number of bonds the ECB holds that can be sold is finite. That likely only gives the ECB a certain amount of headroom to conduct market operations. Also it forces the ECB into raising rates over unloading bonds or they'd be reducing the number of bonds available. The net impact will be higher ECB rates.
2. "Inflation neutrality" makes this far more complex than selling a nominal value of €X in Country A's bonds then buying €X in Country B's bonds. In trading equal weights you would be decreasing the weighted median bond yield across the Eurozone which would itself be inflationary. Consequently you'll actually need to sell more bonds than you buy.
However all that is only theoretical because it also depends on how investors behave in the real world. If yields don't rise in Country A when their bonds are sold the that will be Inflationary and vice versa.
3. If a country ever tries to leave the Euro this will create a massive mess both inside the Eurozone and for that country.
The long and short of it to me is that this does not appear to be such a simple idea to execute.
skwdenyer said:
DeejRC said:
skwdenyer said:
DeejRC said:
It isn’t a fun scenario.
The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get fked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold.
I’ve just set EUR pricing for product for January delivery. I’m modelling at 1.17 FWIW. For me the key issue is EUR:USD linkage. My ideal scenario is EUR strengthening against USD and weakening against GBP The £ has slid over the last cpl of days, 1.16 or so now. I had expected the rate to be nudging 1.25 by Xmas, but looking more like 1.2 now as my best guess. The volatility in the fx markets will continue for the rest of this yr. BOE just put 25pts on today, but it’s the typical Threadneedle restrained reaction to the Fed’s more aggressive approach. The reality is the Fed just fired the starting gun on a potentially v nasty race.
Quite what or where the race is to I don’t know and that is when I get nervous.
Everyone needs to be very very aware of something, WE - the European continent - cannot afford for the ECB to collapse or get f
ked. This sort of action ALWAYS leads to someone getting fked. You don’t raise 75pts as a starter for ten and someone not be on the wrong end of catching the cold. 6 months ago, the same forecasters were predicting close to 1:25 by the end of Q2/2022, reinforcing the basic problem with forecasts having no way of realistically predicting (to coin a phrase) “black signet” events such as Russia’s invasion of Ukraine.
I buy mostly in USD & sell mainly in GBP & EUR. Unsurprisingly, a key objective is to increase the USD component of the sales mix to reduce exposure to input cost FX volatility.
That being said for the first time in quite some time, I actively don’t have any skin in the game atm. I ended my last European client early this year and I’m not currently involved in any bid work for anybody- so I don’t actually have to care about being right on the fx
Good luck to you on 1:17, feels punchy to me and I totally on the predictive ability of the big boys. But then I’ve give chapter and verse on the modelling capabilities of the financial boys over the yrs on here.Slightly terrifing reporting in Telegraph today
https://www.telegraph.co.uk/business/2022/06/28/eu...
European bank stocks are priced for an economic depression. Either they are a screaming buy or Europe faces an extreme political and economic stress test. Analysts at Credit Suisse say equities are discounting a 40pc fall in earnings at current values. This implies a 40pc collapse in house prices, a 9pc-10pc fall in GDP, and a rise in average unemployment to 12pc over the next three years, ceteris paribus. Such an outcome would be the worst European slump in peacetime since modern records began, exceeding the damage of the global financial crisis and the Great Depression (for Europe) in the 1930s
EU leaders never delivered on plans agreed in 2012 for a full banking union. They never tackled the “doom loop”, that lethal and particular Economic and Monetary Union pathology in which sovereign states and commercial banks pull each other down in a self-feeding spiral.
They kicked the issue into touch once the European Central Bank started monetising everything, which masked the problem and sent the doom loop into remission. But the threat remains. That is suddenly front and centre again as inflation forces the ECB to halt purchases of Club Med bonds, and therefore to halt its covert bail-out of Italy and Spain.
The world’s biggest hedge fund sniffs trouble. Ray Dalio’s Bridgewater has doubled bets against European banks and other equities over recent days, disclosing short positions worth $10.5bn on 28 companies. These include Spain’s Banco Santander and Banco Bilbao Vizcaya Argentaria, Italy’s Intesa Sanpaolo, and France’s BNP Paribas.
It is also shorting insurers AXA and Allianz, the energy-intensive chemical group BASF, as well as TotalEnergies and the Dutch semiconductor company ASML Holding. The latter two positions suggest that Bridgewater is turning more bearish on the two big trades of post-Covid reopening: fossil energy and microchips. Perhaps these shorts are just hedges, but I doubt it.
The Stoxx 600 index of European banks is down by 80pc since peaking in 2007, a casualty of the ECB’s negative interest rates. The sector ought to be recovering as the ECB lines up a string of rapid rate rises over coming months.
Oxford professor Richard Werner, a German banking expert, said negative rates have been the kiss of death for Germany’s regional cooperative and savings banks, which specialise in loans to small businesses.
The policy has eroded the interest margin of lenders, down to 1.2pc in Europe viz 3.3pc in the US, and undermined the traditional banking model of lending to companies for productive investment. “The ECB has been forcing banks to lend to the property sector in various ways. The only source of profit for them is to fund this dangerous bubble,” he said.
Relief for the banks has been short-lived. The Stoxx 600 has fallen by a quarter since the invasion of Ukraine from what was already a carpet-bombed structural level. This partly reflects fears that Vladimir Putin will cut off gas flows entirely through Nord Stream 1 to stop Europe restocking before winter.
Germany’s vice-chancellor Robert Habeck is justified in warning that the EU’s energy market is “in danger of collapsing” with the risk of a Lehmanesque chain reaction. He is right too to warn of serious rationing to come. Pre-emptive demand destruction is the responsible policy.
Above all, the bank slide reflects doom loop fears. We had the first taste of deteriorating debt dynamics two weeks ago when Italy’s 10-year bond yields rocketed to 4pc, a quadrupling of the country’s benchmark borrowing rate since January.
Such a move is enough to intrude on assumptions of long-term solvency. “The rise in yields is dramatic and is very clearly a return of the euro crisis,” said Clemens Fuest, president of Germany’s IFO Institute.
https://www.telegraph.co.uk/business/2022/06/28/eu...
European bank stocks are priced for an economic depression. Either they are a screaming buy or Europe faces an extreme political and economic stress test. Analysts at Credit Suisse say equities are discounting a 40pc fall in earnings at current values. This implies a 40pc collapse in house prices, a 9pc-10pc fall in GDP, and a rise in average unemployment to 12pc over the next three years, ceteris paribus. Such an outcome would be the worst European slump in peacetime since modern records began, exceeding the damage of the global financial crisis and the Great Depression (for Europe) in the 1930s
EU leaders never delivered on plans agreed in 2012 for a full banking union. They never tackled the “doom loop”, that lethal and particular Economic and Monetary Union pathology in which sovereign states and commercial banks pull each other down in a self-feeding spiral.
They kicked the issue into touch once the European Central Bank started monetising everything, which masked the problem and sent the doom loop into remission. But the threat remains. That is suddenly front and centre again as inflation forces the ECB to halt purchases of Club Med bonds, and therefore to halt its covert bail-out of Italy and Spain.
The world’s biggest hedge fund sniffs trouble. Ray Dalio’s Bridgewater has doubled bets against European banks and other equities over recent days, disclosing short positions worth $10.5bn on 28 companies. These include Spain’s Banco Santander and Banco Bilbao Vizcaya Argentaria, Italy’s Intesa Sanpaolo, and France’s BNP Paribas.
It is also shorting insurers AXA and Allianz, the energy-intensive chemical group BASF, as well as TotalEnergies and the Dutch semiconductor company ASML Holding. The latter two positions suggest that Bridgewater is turning more bearish on the two big trades of post-Covid reopening: fossil energy and microchips. Perhaps these shorts are just hedges, but I doubt it.
The Stoxx 600 index of European banks is down by 80pc since peaking in 2007, a casualty of the ECB’s negative interest rates. The sector ought to be recovering as the ECB lines up a string of rapid rate rises over coming months.
Oxford professor Richard Werner, a German banking expert, said negative rates have been the kiss of death for Germany’s regional cooperative and savings banks, which specialise in loans to small businesses.
The policy has eroded the interest margin of lenders, down to 1.2pc in Europe viz 3.3pc in the US, and undermined the traditional banking model of lending to companies for productive investment. “The ECB has been forcing banks to lend to the property sector in various ways. The only source of profit for them is to fund this dangerous bubble,” he said.
Relief for the banks has been short-lived. The Stoxx 600 has fallen by a quarter since the invasion of Ukraine from what was already a carpet-bombed structural level. This partly reflects fears that Vladimir Putin will cut off gas flows entirely through Nord Stream 1 to stop Europe restocking before winter.
Germany’s vice-chancellor Robert Habeck is justified in warning that the EU’s energy market is “in danger of collapsing” with the risk of a Lehmanesque chain reaction. He is right too to warn of serious rationing to come. Pre-emptive demand destruction is the responsible policy.
Above all, the bank slide reflects doom loop fears. We had the first taste of deteriorating debt dynamics two weeks ago when Italy’s 10-year bond yields rocketed to 4pc, a quadrupling of the country’s benchmark borrowing rate since January.
Such a move is enough to intrude on assumptions of long-term solvency. “The rise in yields is dramatic and is very clearly a return of the euro crisis,” said Clemens Fuest, president of Germany’s IFO Institute.
Bandit said:
Analysts at Credit Suisse say equities are discounting a 40pc fall in earnings at current values. This implies a 40pc collapse in house prices, a 9pc-10pc fall in GDP, and a rise in average unemployment to 12pc over the next three years, ceteris paribus. Such an outcome would be the worst European slump in peacetime since modern records began, exceeding the damage of the global financial crisis and the Great Depression (for Europe) in the 1930s.
If that happens, the UK is fked.M.
Mortarboard said:
Bandit said:
Analysts at Credit Suisse say equities are discounting a 40pc fall in earnings at current values. This implies a 40pc collapse in house prices, a 9pc-10pc fall in GDP, and a rise in average unemployment to 12pc over the next three years, ceteris paribus. Such an outcome would be the worst European slump in peacetime since modern records began, exceeding the damage of the global financial crisis and the Great Depression (for Europe) in the 1930s.
If that happens, the UK is fked.M.
Bandit said:
Mortarboard said:
Bandit said:
Analysts at Credit Suisse say equities are discounting a 40pc fall in earnings at current values. This implies a 40pc collapse in house prices, a 9pc-10pc fall in GDP, and a rise in average unemployment to 12pc over the next three years, ceteris paribus. Such an outcome would be the worst European slump in peacetime since modern records began, exceeding the damage of the global financial crisis and the Great Depression (for Europe) in the 1930s.
If that happens, the UK is fked.M.
Perhaps if we didn’t party it up so much in the good times we’d leave some aside for the bad times, and could use such times to stimulate the economy with infrastructure investment.
We just need a few big distractions to get us through the next 5 years without people looking for politicians heads on spikes.
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