The consensus with which I agree is that the Euro zone is heading into a recession. While the economic activity has somewhat improved over the last months in the U.S. I remain doubtful whether the U.S. can escape the recession when Europe enters one. The data coming from China doesn’t (jet) point to a hard landing. For the time being it looks like that the Chinese government is in control. The measures to contain inflation and raising real-estate prices are successful, while in the same time China is has taken early steps to increase domestic consumption and re-balance the economy. One should not disregard and keep close watch on soft data coming from China especially in real estate and commodity related industries which are not reflected in the official data and could be pointing to serious issues.

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So, the basis of the agreement is a 50% cut in the face value of Greek bonds held by private creditors. The agreement will reduce Greek debt level to 120% of GDP by 2020.

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Leading economic indicators are pointing to a recession. At the time being it looks like it could be a mild one, but taken into account all the unknowns (EMU future, China slowdown, bank balance-sheet question) it could easily develop into something more ominous.

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Global economic growth is clearly slowing down.

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Mostly unchanged from April…

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I have lost flair in making predictions. I even started to think that correct forecasting is impossible. Maybe it is better to look at forecasting only as to the extent “what if” exercise. That’s why this is the first strategy post this year.

I have to come to conclusion that the only relevant judgement on is made by market and this is the key in being a successful in this line of business. What is fair, what is right or what is logical are completely irrelevant questions in speculating. Fundamentals are most of the time only a peripheral factors affecting the prices; in fact fundamentals are major factor only in times of great excesses.

Now, lets get back to writing down my current mind setup.

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Bloomberg:

European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month to fight accelerating inflation pressures.
An “increase of interest rates in the next meeting is possible,” told reporters in Frankfurt today after the centralbank left its key rate at a record low of 1 percent. “Strong vigilance is warranted,” Trichet said, adding that any increase would not necessarily be the start of a “series” of moves.

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In the last months global economic outlook has improved a bit. In U.S. we can see signs of personal consumption and manufacturing activity growing at soft rates, but growing; at the same time employment, housing, construction spending, durable goods orders are stagnating. Fall in initial jobless claims is clearly being offset by inflow of people into the workforce; job creation still weak.

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No real change in ECB policy and measures.

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Euro Group (EU members which introduced Euro as their currency) introduced today the European Stability Mechanism (ESM). This is the finale of German push to introduce a mechanism for a private investor’s loss sharing in case of future bailouts.

The ESM kicks in in June 2013, which means Euro group support for Eurozone members in problems effectively stops then.

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Spain 10 year government bond spread vs. it’s German peer reached new high of 255 bps. Irish bond spread reached record high of 654 bps.

Markets have lost faith in EU bailout plan and are now finding out (again) that math is quite exact science. CNBC Europe has even sent it’s anchor to Lisbon to provide live coverage of Portugal bailout; they were wrong: the markets skipped Portugal and moved to big story – Spain. Spain has a funding requirement of at least €155bn in 2010. Looks intimidating, especially if we took to account the fact that Ireland was pre-funded for the first half of the 2011 and despite that needed a bailout.

This puts the markets near the point where the only solution is the Ben Bernanke way – buy worthless paper and stuff cash in monetary system. I would do it fast, but I doubt on EU leadership determination. In any case, more the ECB waits the situation will get worse.

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And we have a second EU bailout.

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It appears that Ireland is moving closer toward some kind of bailout. It is clear that Irish government want to keep some kind of fiscal independence and shift the focus toward bank problems, not country problems…

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This is the absolute truth. Indecisive politicians and lack of leadership are two most significant EU problems…

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While we wait to see whether Ireland will be bailed out today I’ll post todays interesting reads…

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