8th February 2012: Merkozy Gets Too Cozy?

Sarkozy and Hollande Split Over European Policy

Quote of the Day:

That Nicolas Sarkozy needs Madame Merkel says a lot about his situation.

Francois Hollande – Leader of French Socialist Party (Main Opposition To Sarkozy)

Macro Overview

The French Political Black Swan

• I’m surprised little has been made of this but the political situation in France is lining up to be something of a rather serious problem for Europe. You will remember, of course, that the bedrock of all the political progress so far has manifested itself in a, rather Franco-Germanic, Treaty Change program – the new snug relationship between Merkel and Sarkozy being dubbed “Merkozy”. This was indeed good progress. By European standards it was rampant, euphoric, leaping-forward-like-a-hyperactive-impala-like progress – as I highlighted in my piece: “Treaty Change” – At Last A Substantive Debate.
• But, in the international press, relatively little has been made of the fact that France has an election looming and Sarkozy has done little in the way of campaigning – OK that’s just “his style”. But it rings a few alarm bells when his main opposition, the Socialist Party’s Francois Hollande, appears to be ahead of Sarkozy by a country mile. It gets yet more disturbing when we follow through the effects of Hollande’s European policy … to tear up the aforementioned “Merkozy Treaty Change” plan! That would certainly set the cat among the pigeons. Reuters article: Ignore French Elections at your peril.
• Note to self: DO NOT TAKE YOUR EYES OFF THE FRENCH ELECTION FOR ONE MINUTE!

Merkel Maneuvers

• Nobody really understands Merkel’s positioning when she announced that she was essentially going to be a campaign cheerleader for Sarkozy – now clearly the second favourite in the race. Cross-fertilization of politics in Europe is getting very confusing n’est pas? I like this blog article in Time Magazine: Why Did Merkel Endorse Sarkozy’s French Presidential Re-Election Bid? It really is a must read.
• But, actually, I can understand this strategy from Merkel’s point of view. This is just more opportunistic political maneuvering. If Sarkozy loses, Hollande will come across the very same economic wall that Sarkozy did and he will eventually have to yield to German authority – no matter what he says in the campaign leading up to the election. If Sarkozy wins, then Merkel’s got France (and effectively Europe) eating out of the palm of her hand… more-so than she does already – if that’s possible.
• All part of what I have previously satirically called Germany’s immaculate conception for the new, rather Germanic, states of Europe. But as I’ve said before, Germany should be careful what she wishes for – Europeans outside the AAA core must be growing more and more wary of Germany’s political influence in their domestic affairs.
• It appears to me that Merkel is in her element in this high stakes game of international political horse-trading – it’s like she’d been waiting and preparing all her life for this moment. It is not surprising to me that her ratings just shot through the roof.

 

Market Overview

Credit Markets Turning Sights Back On Greece

• We still do not have a definitive resolution to Greece and, like we thought, the market is now in the phase where it is losing patience. Once again, time is working against the politicians. In fact it rarely works for them. The market is continuously forcing the hand of these “government bond salesmen” you’d think they would have figured this out by now.
• Today Chart of the Day depicts the rather ominous situation in Greece. 5yr Greek CDS may be liquid but it is not really moving. The 1 year CDS, which is also very liquid and is a representation of the probability of a “credit event” occurring in Greece within a year, is a far more interesting chart. My two Charts show the 1 year CDS and also the steepening of the Greek yield curve inversion – which, incidentally, is not a good thing.

 

Chart of the Day

Greek 1 Yr CDS (Source: Bloomberg)

 

Greek 2s-10s Steepness (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Japan Machine Orders
• ECB

Alerts:

• Nothing Significant

 

Corporate Events:

Results:

• Credit Suisse [CSGN VX], Daimler [DAI GR], Danske [DANSKE DC], ING [ING NA], KBC [KBC BB], Pepsico [PEP], Philip Morris [PM], Rio Tinto [RIOAU], Rolls Royce [RR/ LN],

Dividends:

• Nothing Significant

 

Reading, Links:

Nothing Significant.