... the market damage looks set to become more structural in nature. Spreads among EMU sovereigns remain at very elevated levels even in the face of the unparalleled EU stabilisation fund and ECB bond purchases. True, spreads of the “high yielders” (Greece, Ireland, Portugal) have come in by more than 100bp after the announcement, Greece is even more than 400bp tighter (see left-hand chart below). More worrisome, however, is the fact that spreads of the peripheral heavyweights Spain and Italy are trading back near their widest levels (see right-hand chart below).Click on charts to enlarge, courtesy of Commerzbank.
Therefore, some may believe, like the analysts at BNP Paribas wrote yesterday:
At the end of the day, the continuation of this quantitative easing competition amongst industrialised nations will prolong currency appreciation in emerging economies and keep their markets flooded with surplus funds. Indeed, the major emerging equity markets rebounded towards the end of last week.Click on chart to enlarge, courtesy of BNP Paribas.
A depressionary “liquidity trap” – a scenario of unrealised growth potential from the starting point of current depressed credit channels and growth levels – is, in our view, the real risk. And since weaker growth would ultimately increase public leverage, the longer the financial system remains unstable, the greater the chance of a more inherently unstable global economy through rising public sector liabilities across major economies. In any case, there is ample uncertainty about systemic and cyclical risks related to the major economies that keep markets volatile.
So, ready to jump?