In chess, the end game is the point at which there are a relatively limited number of pieces on the board. Many chess analysts disagree as to when exactly the end game begins, but they all agree that when the end game begins, strategy is much different than the middle game. In fact, over time the world's best chess players have always excelled at the end game and utilized a consistent strategy.
Yesterday was one of those stock market days that certainly made a few investors wonder whether the global economic growth end game is actually here yet, or close. The snap back in U.S. equities didn't necessarily surprise us but obviously characterized the almost bi-polar sentiment that currently exists in global equities. One day bad news matters, the next day good news matters more. The global economic growth slowing end game is here, then it isn't.
Meanwhile in Spain over night we did get more evidence of the debt end game. The nation that will continue to be the pressure point in European sovereign debt issues this year, reported that non-performing bank loans accelerated from December and now total €143.82B, which is an 18-year high. The big risk is that this level of non-performing loans accelerates dramatically as property prices continue to revert to the mean.
The key issue with Spain accelerating to the downside from a debt perspective is that Germany is basically on record saying that Spain is too big to save. And so is Italy. Not being able to save either Italy or Spain is certainly a European sovereign debt end game that is increasingly concerning. To be fair, though, Spanish 10-year yields are now solidly below the 6% line at 5.78%, which is a positive, but the IBEX this morning is down -3.2%. Tomorrow we get the longer term Spanish bond auctions and they, too, will likely be as successful as any artificially controlled market.
The major political catalyst this week in Europe is the French elections, with the first round this weekend. Since a major candidate has to garner 50% to win, it is likely there is a second round given there are major candidates competing. Currently, the polls from CSA have Hollande leading Sarkozy 29% to 24% in Round 1. This is an improvement from being tied a few days ago. The polls then show Hollande mercy-crushing Sarkozy in Round 2, by a margin of 58% to 42%.
The French election is critical because: A) Hollande is a Socialist, B) Hollande is a Socialist, and C) Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries. Things are about to get a lot more challenging politically in the great monetary union that is the Eurozone.
In the U.S. we are fully in the midst of earnings season. Our banking analyst wrote this yesterday as it related to the financial sector:
"Roughly one third of financial companies have reported earnings so far. Seven of the eight large- or mid-cap companies have beaten estimates on the bottom line. Revenue trends have been more mixed, with just over 1/3 beating estimates, 1/3 in-line and just under 1/3 missing. However, this is a bit misleading because of Debt Value Adjustment. With DVA, the big banks' revenue lines are adversely affected by an accounting convention that requires them to recognize negative revenues when their credit default swaps tighten. First quarter saw sizeable CDS tightening, so the headwind was significant for all the large-cap capital markets sensitive names: C, JPM, BAC, GS, MS."
