Greece is celebrating. Is there a reason?

Cheer loudly and celebrate for three days! Believe it or not, Greece really issued its government bonds for the first time in three years. The fact that Greece, burdened with bankruptcy, has returned back to the financial markets has been giving strength to the European stocks past hours and days.

However, from my point of view, there is not much to celebrate. Issuing of five-year Greek bond in the volume of three billion euros with a yield of 4.625 % is still expensive. The Czech government bonds with more than twice longer 10-year to maturity are carrying a yield under 1 %. But Greece together with the entire Europe is despite that rejoicing that Greek bankruptcy is forgotten.

I don’t want to be a bad prophet but I think that it is not definite. Greece is still relying on foreign help. We could have read a couple of weeks ago that Greece can draw another part of the loan from the third rescue programme in the sum of 8.5 billion EUR. All of that while considering that the Greek government debt is still making fewer than 180 % GDP. On top of that, its size hasn’t been dropping past years but is roughly stagnating.

The European central bank might start limiting the buyout of the government bonds already in autumn. That means that it is going to partly leave the line on buying the debts of individual countries. And that is going to mean that the yields of the government bonds of the European countries are going to go gradually upwards sooner or later. And if the yields in countries such as the Netherlands or France are going to grow then the yields of Greek government bonds can be rising twice as fast.

As a Europe, we are going to worry again...

The economic world is synchronising

It seems that the global economy is going through an interesting twist of events. We have been observing for years how after the crisis in the years 2008 and 2009, the world split apart. Asia barely noticed the crisis, America recovered soon but Europe couldn’t recover for a long time.

Only when it seemed that something is sort of getting better the bankruptcy of Greece hit and then the infection of Cyprus and others.

But now something is starting to change. Apart from some exceptions, Europe is also growing. Suddenly almost the entire world is growing.

That is getting confirmed by numbers that has been published today from Germany where the exports grow significantly faster than it was expected. It seems that the German economy is going to grow this year beyond all estimations. The growth of the German export is so fast that even the MFF is warning about it and suggesting Germany to increase the domestic investments so the German imports would grow and Germany wouldn’t be generating such a high trade surplus.

Everybody is afraid that if Germany has big surplus somebody else has to have a deficit which is creating an imbalance on the planet and potential problems to the future. That’s why many people are betting on the interest rates growing soon in Europe. But people are betting on the same thing in America as well anyway.

The Canadian central bank could start the global winding down of the monetary policy this week already. It is justifiably fearing that the average Canadian is indebted too much because of the all-time low interest rates. The debt of Canadian households has doubled in comparison with the year 2009. To keep the interest rates all-time low is dangerous. It could lead to the households getting overly indebted. But raising the interest rates is also dangerous because many people won’t suddenly have money for payments and it is going to start a recession and a rise of bankruptcies. That’s why the raising of the interest rates needs to be gradual.

That is changing the situation on the financial markets. Bond yields are going up all over the planet. The outlook of the dollar is not as good and clear as it used to be. On top of that, many people expected great things and changes of D. Trump. He hasn’t changed much in the economic area so far which might cause disappointment. That’s why we are expecting stagnation to a slight depreciation of the dollar for the majority of following month. The dollar is going to stay most of the time in the interval from 1.12 to 1.16 USD/EUR.

Banks in troubles

It is generally known that you can see a bottle of wine, that somebody drank a half of, as a bottle that is half empty or half full. It is only about the angle you look at it. The volume of the liquid is still the same. Financial markets are similar.

A news came that could be perceived both as a tragedy of the Italian economy or we can see it optimistically as a rescue of not only Italian but also European economy. The markets decided for that optimistic viewpoint. And that is why the stocks have been growing today. The Frankfurt stock exchange has been adding 0.6 %, the Paris one 1.0 % and the Milan one right away 1.3 %.

Markets have simply been thrilled about the news that the Italian government is going to pay 5.2 billion euros to the Intesa bank and provide a guarantee of another up to 12 billion euros for taking over the Popolare di Vicenza bank and Veneto Banca which bankrupted. The market sees it positively because the bank is going to take over only the good assets only for one euro. In the eyes of the investors, it is like it choses only the cherries from the sundae.

From the point of view of the entire banking sector, it is a good news. Italy has a giant amount of bad loans and now their big part is going to get outside of the banking sector. But everything has its price. The Italian government has been saving another bank not long ago and it poured in it 6.6 bn. euros. So it is cumulated 17.2 bn. That means almost 24 bn. euros in several weeks. By the end of the year – before this rescue – the Italian debt to GDP was 133 %.

So Italy is going to get indebted even more. I think that Italy is going to be a big problem for the Eurozone. Much bigger than Greece because it is a big country. Indebtedness of the South of Europe is not and won’t be solved just like that and the Northern part of Europe is going to pay it one day.

The world votes for the bitcoin

There is a problem in Europe: The ECB should have a bond portfolio in the amount of 2.3 trillion euros by the end of the year. But it is more complicated. The ECB has been saving indebted south-European economies by those bonds-buyouts. It is the biggest creditor of European governments. So the ECB is going to be under a giant political pressure not to raise the interest rates.

Moreover, the south of Europe needs low interest rates for another reason too. Italian banks are having problems with bad loans. While the bad loans had a share only of 3 % in the year 2009 today it is even 13 % (!). Raising of the interest rates might endanger the banks.

On the other hand, keeping the interest rates on the current levels is also wrong. Even though Europe doesn’t have a traditional consumer inflation, the growth of prices has manifested elsewhere. It looks like there is a mortgage bubble in many countries, stocks are incredibly high and digital currencies are growing to all-time highs as well.

While the bitcoin was at 1000 dollars at the beginning of April, it is at 2725 dollars today and it has been almost on 3000 dollars at the beginning of the week. That’s why the chief of Bundesbank warned of the dangers from digital currencies. It is understandable. Everything is heading towards the digital currencies replacing the current currencies one day because the central bankers are failing. So the fish doesn’t want to drain the pond.

Reactions on the bitcoin are coming from the investment banks as well. Morgan Stanley is asking for the bitcoin regulation. I think that the fewer people trust the central banks the higher the bitcoin would go. It is a reaction to the scepticism in society. Gold is doing similarly. It is important that it is growing in the long run. Today it is at 1270 dollars per ounce and it was at 670 dollars ten years ago. The more complicated the world is the more interesting gold is.

The growth of the global economy is false

We can say a good news. OECD has adjusted its expectations concerning the global growth. While in November, it has been expecting that the planet is going to grow by 3.3 % in the year 2017, today it is expecting that it is going to grow by 3.5 % and in the year 2018 even by 3.6 %. If the prognosis gets fulfilled it is going to be the most significant growth since the year 2011. It would be great if OECD was right - but I am cautious.

The world has changed a lot. Patterns which have been working for years are not working anymore. It is extremely difficult to make prognosis today. The yield curve has been working as an effective tool of prediction for years. You could tell a lot about the entire economy from the difference of 2-year and 10-year yield. The bigger was the difference the more were the investors speculating on the recovery of the economy and on the growth of the interest rates of central banks. But today?

For example at the American bonds, this difference has been getting smaller for a couple of months which should hypothetically mean a speculation on a crisis. But that is definitely not expected according to OECD. We all can relativize this and take it down by saying that let’s say the interest rates are significantly influenced by the decisions of central banks and those are behaving unusually so the difference of interest doesn’t have such good predictive ability as it had twenty years ago. But we do have new tools.

For example, bitcoin is right under the all-time high today and moving around 2860 dollars. It was still around 1200 dollars three months ago. Why? Because the investors are preferring alternative investments. Simply said, they think something is stinky in the standard economy. The same goes for gold. That has reached to its seven-month high. When has the gold always been growing in the history? When a crisis was coming up or when the investors were fearing something. So how is OECD going to deal with this?

No matter what side we look at this, investors are suddenly doubting that it is possible to be raising the interest rates quickly. Economic recovery should be automatically connected to the growth of the interest rates… Many are assured of this also because of the development on Spanish banking market. The biggest bank in the country announced that it is going to buy the struggling Banco Popular for symbolic one euro and increase its capital by 7 bn. euros. That is showing nothing more than a weakness of the sector which is still dusty from the last crisis.

All things considered, I still think that the growth of the global economy is false from a big part and it is pulled by artificial demand from the central banks.  Many central banks are already owning a giant share in the industry. For example, the central bank of Japan has ownership of more than 20 % share at many key companies. It is simply rather a growth on the paper then a real one.

Danger of impeachment

Sometimes one has a feeling like the internet is giving them unbelievable opportunities. And sometimes one has a feeling that the internet took democracy from them. We do have unbelievably fast media and never-ending plurality because of the internet. There are so many opinions and news that one can’t distinguish real from fake and important from unimportant. Which is somehow complicating the legibility of world especially in the connection with the fact that not only Russia but the rest of the world is as well ruled by oligarchs who think that they are endlessly smart and unshakable. It is true even in the USA.

A fairly surprising news that has a strong potential to influence the financial markets came from the USA. The American president D. Trump is in a danger of impeachment, meaning the constitutional legal action leading to dismissal from the office for pressing the chief of FBI to not investigate his former security adviser who was accused of cooperation with Russia. On top of that, the pressure on Trump is growing because he told the Russian president significant military secret. However, the Russian president stated to the media today that the American president didn’t tell him anything. By doing that he stood up for the American president but didn’t calm down the situation in any way, on the contrary, he only added the fuel to the fire of speculators that Russia has financed Trump’s campaign and now it’s covering for him.

That started a spiral of hypotheses that are all leading to the democracy being rotten. Logically, that immediately rose worries among speculators that Trump won’t be able to unite the American parliament and enforce what he has been planning before the elections at this disturbing situation. That’s why the stocks are dropping and the dollar is depreciating. Let’s remember how the financial markets were growing in expectations at the beginning of the year that almost omnipotent Trump will fix the world. The excitement and the golden aura have vanished like when you swoosh a magic wand at least in the eyes of the financial speculators. Gold is thanks to that quickly growing. The market is looking for a safe haven just like I have been already mentioning last week. The price has been still under 1220 dollars per ounce on 10th May and now it is at 1248 dollars.

It is a habit of politicians that when the situation gets serious they are trying to divert the attention. That’s why there is a logical chance that Trump could surprisingly send a couple of missiles on North Korea like he did some time ago in Syria. Media would be paying attention to the chance of the nuclear war and not to the impeachment. But today the gold hasn’t even reached its twenty-day average yet. That’s why I think it still has more space for growth.
In the light of all these events, the dollar depreciated against the euro today to the weakest value since D. Trump has been elected into the office. That is a really weak exchange rate. The twenty-day average is stronger by two cents. If Trump won’t do some other misstep and handles the situation this time as well, I think the dollar is going to return to the stronger values. The current exchange rate is not matching the strength of the America. (It would be of course different if the impeachment was really set into the motion which is something I’m not betting on.)

Marketa Sichtarova, Vladimir Pikora

The gold is looking good

The financial markets are once again optimistic. They are STILL (!) living by E. Macron’s victory in the French presidential election. But it was a stress for the multinational corporations. Le Pen could hypothetically cause them significant losses with her fight against globalisation.

Thus, Macron’s victory torpedoed the gold. The price returned where it has been last time in March. The investors are not fearing the political instability anymore but they are rather looking at the interest rates and as it is known the gold is not carrying any interest which should lower its price even more. The current price is 4 dollars under the 100-day average - which is not a bad price for buying. Why?

Unlike others, I am assuming that Macron’s winning doesn’t mean we have all the complications behind us. Korea is going to return like a boomerang. And there is one more thing: There is a new indicator of the risk apart from the gold and that is bitcoin. It has always been growing when somewhere on the planet the governments are getting stricter. One time it was Cyprus, one time India and one time China. Bitcoin reached its new all-time high yesterday.

It reached even to 1750 dollars at one moment. Its exchange rate was 778 dollars a year ago and less than a month 1150 dollars. So the investors seeking the risk are seeing risk even now after Macron’s victory. To buy bitcoin now in this phase of the sinusoid is in my opinion too late but the time doesn’t have to be bad for gold...