SOCGEN: Another 'Eurozone Shockwave' Is Coming This Spring

Matthew Boesler

 Mar. 14, 2013

Société Générale

Société Générale strategists are warning clients of another "Eurozone shockwave" coming this spring.

In fact, they say it's going to be one of the three major themes driving global currency markets for the rest of 2013.

The Italian election yielded inconclusive results, and it's looking more and more likely that another election will have to be held. Of course, that one may not be conclusive either.

Meanwhile, Germany holds its own elections in September. If Italian bond yields rise to unsustainable levels, German politicians aren't likely to be too supportive of their neighbors to the south while trying to secure re-election at home.

In his latest report, SocGen strategist Vincent Chaigneau writes:

The post-Italian election has been fairly quiet. But we are concerned ... It is not just the political uncertainty, but the fact that reforms will surely be on the backburner for another six months at least. And with such political instability, it would be very hard to access the ECB’s OMT.

Germany, now six months into a general election, will not be keen to share further risks and tolerate policy slippage. The last BTP auctions did not reassure us. Arguably, peripheral spreads haven’t been a major mover of EUR/USD of late. Rather, the relative rate dynamics (theme 2) have been pushing EUR/USD down. But fresh woes would still undermine the euro. And spread tensions would support expectations that the OMT will be activated.

It is far too early to dismiss EA crisis as a key driver. We fear another shockwave in the spring. It will not be as strong as last year, given positioning (foreign exposure to non-core markets much smaller than a year ago) and the available tools of last resort (ESM/ECB buying, at least for Spain, after agreement on a MoU). However, it will be strong enough to undermine the euro in the coming months, and more so now that the key 1.2930/70 area is broken.

SocGen Presents 5 Key Clues On What's About To Happen In Europe

Joe Weisenthal

Wikimedia Commons

SocGen economist Michala Marcussen has a fantastic note out this morning putting together some of the puzzle pieces to figure out what's going to happen next in Europe.

First, Marcussen sets the scene: There's hype ahead of the September 6 meeting. There are all kinds of pre-meetings planned. Rumors are flying in the press.

Suspense is mounting ahead of the 6 September ECB meeting where markets hope to see the modalities of the new non-standard measures unveiled. Press is rife with debate on the possibilities and, on Monday, Italian Industry Minister Passera criticised an excess of "incoherent and
disruptive communications which have also disturbed markets." One message is clear and consistent, however, there will be further risk sharing in the euro area, but NOT without conditionality. Conditionality is a political process and will take time, a conclusion that is entirely consistent
with steeper peripheral yield curves.

Euro-area crisis resolution talks are still ongoing at both the ECB and amongst European leaders. Chancellor Merkel is due to meet President Hollande on 23 August, Prime Minister Samaras on 24 August, Prime Minister Monti on 29 August and Prime Minister Rajoy on 6 September – coincidentally the same day that markets hope the ECB will unveil the modalities of the new non-standard measures announced by President Draghi at the 2 August ECB meeting.

In our opinion, there is today no final blueprint ready. The Bundesbank’s Monthly Report (released Monday) offered some new clues, however. Weighing these along with other available evidence, several points stand out.

Marcussen then lays out 5 points, which we shall summarize:

• Conditionality is key. There's no way that countries are going to get major aid without submitting to conditions on budgets and oversight. This the Germans have always been clear on...
• The ECB will only target shorter maturies. This Draghi has made clear, and it is consistent with the notion of conditionality.
• ECB bond buying could be unlimited. Draghi hinted at this, and even the Bundesbank acknowledged this.
• Risk sharing is not risk elimination. There is always risk, even in Germany.
• The Bundesbank still doesn't like bond buying.

So the blueprint isn't there yet, but a lot of hints are coming.

Pay close attention to the upcoming meetings between the various leaders: Monti, Hollande, Rajoy, Merkel. That's where a lot of political work will happen to grease the wheels for the ECB.

Finally, Marcussen believes that all of this is consistent with the latest "bull steeping" in the European peripheral bond markets, whereby yields are coming down everywhere, but doing so a lot faster at the short end, while still remaining quite elevated at the long end.

SocGen: We Expect A $600B QE3 Plan To Be Announced This Week

Matthew Boesler

 Jun. 18, 2012

Bloomberg TV

A third round of quantitative easing is coming this Wednesday, top Société Générale economist Michala Marcussen says.

Marcussen writes that if anything, the boost will help "only at the margins."

"We have long held the view that each new round of QE comes with diminishing returns," she says. "We nonetheless see the impact as positive – if nothing else giving the reassurance of a pilot in the plane."

On how the Federal Reserve will announce and implement QE3:

With economic data signalling stall speed growth for the US, we expect the Fed to lower its current 2012 growth outlook from 2.7%, narrowing the gap to our own forecast of 1.8%. This – and the risks from the euro area debt crisis – will allow the Fed to adopt QE3 at the June 20 FOMC. We estimate the Fed could extend twist by another $150bn, butour expectation is that the Fed will instead allow its balance sheet to expand a further $600bn, with purchases split 40/60% between MBS and Treasuries.