Bailouts Buoy Stocks But Not Animal Spirits

Authored by Richard Breslow via Bloomberg,

Equities are pointing higher, as are emerging markets, after a rocky start in Asia. I’m not entirely sure what that’s supposed to mean. Bond yields are marginally higher. One thing we’ve been, largely, but not totally, spared from is having to hear it’s risk on. Higher prices are risky, to be sure, and what the authorities want, but there is a decided lack of animal spirits.

That howling you are hearing should be understood for what it is. We’ve been buying because that is what we’ve been told to do.

Bond deals are plenty and, mostly, going well. As long as issuers are willing to swallow some concessions that stand out noticeably on the screens. Spain, among others, sold bonds this morning to record-setting demand. Happy days. It took a back-up in yields of some 12 basis points to garner that sizable interest before things promptly rallied. The game is afoot.

It’s not difficult to be in a crabby mood, even with prices higher. It seems we are in a holding pattern and living hand-to-mouth on continuing injections of government stimulus. The Senate sent another relief bill to the House last night. They should have. It’s supporting things. It is expected to be passed on Thursday. Let’s hope it is used wisely without unfortunate stories about those who don’t need it taking a share. Presumably this is helping support S&P 500 future prices. But it doesn’t feel particularly happy. Perhaps, on Friday, we can all go to Georgia, where they are planning on reopening tattoo parlors and get some new ink to cheer ourselves up. They’ll tell us that it was the right thing to do because tourism seems to be increasing.

Meanwhile, and more intriguing, we are all waiting to see what kind of rescue plan Europe will agree on tomorrow. The stakes are high. It’s rather extraordinary that, at this late date, we still don’t know what will come out of the teleconference. Europe rarely has these things tied up nicely before the principals get together. Which is why a great laugh-out-loud moment came yesterday when ECB Governing Council member Klaas Knot, from northern state Netherlands, said, “Speculating about ECB exit strategy is too early.”

I’ll take an educated guess on what is likely to end up happening, however. They will be more generous than they have ever been before. Demand fewer conditions. Presumably they have learned from past blunders. But avoid mutualized debt obligations. That will come some day, just not Thursday. Get acceptance from the Italians. And that will be the peace. Markets should take that as a win. And it could be another positive market event. The ECB can put the icing on the cake and make it clear that the capital key, and other restrictions have, under the circumstances, lots of wiggle room. Knot also said that during the crisis, the ECB should be “open minded.” That was unlikely to have been a throw-away line.

The euro is sitting on about 100 pips of a support zone, so it’s worth watching. And both the Dollar and Bloomberg currency indexes are at interesting pivots so, depending on what happens, they could signal nice short-, even medium-, term trade opportunities. The Italian FTSE MIB Index is just below resistance on both a moving average and retracement basis. It has room to move, as John Mayall might have said.

It’s easy to have sympathy for those who look at markets with a jaundiced eye. With all this support flooding in, that trade may need to wait until things get better.