My Diary 689 --- The Expected G4 Ramp-up; What Credit has Priced

My Diary 689 --- The Expected G4 Ramp-up; What Credit has Priced in? China Awating the Turning Point; Thinking ahead of Currency

Sunday, September 18, 2011

“The Political Will vs. the Market Intelligence” --- It was the Lehman anniversary On Monday. Let us take a quick look at what we stand now relative to the fateful Monday 3 years ago. In short, there is some similarity between Euro Crisis and Subprime Crisis, of which in each case the excess leverage is built upon a supposedly riskless asset, namely mortgage CDOs in 2008 and European sovereign bonds now. The difference is the crisis response mechanism. In 2008, US government authorities that were needed to respond to the crisis were in place. Today in EMU, one of the key authorities, the common treasury, has yet to exist. This then requires a political process involving many member states, which are under pressure to hold the Euro system together. The problem is politicians are nothing more than business men/women as they would only do the minimum, and that is soon perceived by the market intelligence as inadequate. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous. That is why Europe is condemned to a seemingly unending series of crises.

Another major change of landscape compared now with 3 years ago is demonstrated by various asset classes’ performance. In equities, SP500 is pretty much flat with DJ Stoxx 600 -17% (with European banks -55%). In credit, X-over, Main, Fin Sen and Fin Sub are 135bp, 58bp, 168bp and 275bp wider. US credit is actually tighter in a role reversal of 2008 with IG -66bp and CDX HY -94bp. In government bonds, 10yr UST yields are now 140bp lower with UK and German equivalents over 200bps lower. In Sov CDS, back then Greece, Ireland, Portugal, Italy and Spain all traded between 40-80bp. This is clearly the biggest change since this point as Lehman marked the point where this crisis went from solely private to one where Government's around the world took the burdens on. In precious metal, Gold is up 131% largely due to the liquidity responses post the crisis. More importantly, to those global investors the conventional asset allocation (simply spreading capital across assets) is not working as usually anymore. In fact, it offers woefully inadequate diversification benefits when asset returns are exposed to the same set of underlying risk factors. For instance a 60/40 equity/bond portfolio is 100% exposed to unexpected inflation or sovereign risk, while 14 different HF strategies (according to Credit Suisse) endured their worst ever drawdown YTD (same as they were in the 2008 crisis as all were implicitly short liquidity risk). It is worth noting that the 3yr correlation of HF returns with SP500 is now running at a record high of +0.8, and alpha has collapsed to a near-record low. Geographically, despite stronger fundamentals, EM has underperformed DM for nearly a year by 600bps. From asset allocation perspective, however, EM is no longer a good diversification as in the past five years, its volatility continues to go down and its alpha is also declining thanks to the economic globalization and rising impact of financial markets. But I think the relative U/P was driven by the concerns of inflation out of control, tightening overdone and therefore hard landing as a result. Now it seems that these concerns are somewhat fading out with inflation peaking off, DM continuing to deteriorate and policies starting to change (Brazil as the first). Thus I do believe that the structural advantages of EM remain intact, including demographics, higher growth, and strong balance sheet. Cheaper valuation with stronger growth are also suggesting out performance. What we need is the confidence that EM policymakers can engineer a favorable growth-inflation mix, which will help realize the EM equities value.

Having said so, the European sovereign debt crisis shows no real signs of abating and hence the risk of greater spillovers to the real economy remains elevated. There is the direct effect via the planned fiscal consolidations, which are particularly large in the periphery and Italy and are likely to, on average, push these economies into recession in the coming quarters. In addition, spillover to core countries also works via confidence, changes in asset prices and via pressures on banking systems. In my own view, assessing the growth outlook correctly is important for gauging whether a sovereign is likely to complete its fiscal journey successfully. According to a research done by JPMorgan, of which is based on 48 episodes of fiscal consolidation across nine Euro area countries since 1980, growth across the periphery area in coming years is likely to fall short of official projections. The biggest shortfalls relative to official projections appear to be in Greece and Ireland. In Greece, the government expects growth to resume next year, whereas JPM suggest that the recession will remain deep in 2012 and continue beyond that. Along with the poor growth outlook, there is also considerable policy uncertainty. Policymakers have yet to decide about the next tranche of bailout money to Greece, they have yet to fully ratify the expanded EFSF, and they have yet to implement the PSI in the latest Greek package. In addition, questions about a harder Greek debt restructuring will not go away, especially once the expanded EFSF is operational. The ECB is also facing continued internal pressure around its Securities Markets Program. Following last week’s resignation of its main critic, Jürgen Stark, from the ECB’s Executive Board, the president of the Bundesbank, Jens Weidmann, reiterated his opposition to further bond purchases again this week.

While EMU policymakers struggle to strike a balance between individual austerity and risks of contagion on the one hand and moral hazard and socialization of regional debt on the other hand, the ECB is left to hold the financial system together. The week saw markets took comfort in the ECB’s announcement of 3M USD liquidity offerings to assure funding through year-end. Note that the move did not involve any new action by the Fed, as the Fed’s USD unlimited swap line to the ECB has been in place for some time. But this is not the end of crisis. As conditions in the periphery continue to deteriorate, they weigh further on growth in the Euro area’s core. One obvious concern is that spillover of credit concerns throughout the EU banking system has the potential to tighten credit conditions. The pressure on core banks is partly related to the direct exposure to the Greek sovereign and private sectors. Although exposures to Greek sovereign debt are a manageable EUR31.7bn, foreign bank exposure to all Greek debt amounts to EUR97bn with French banks particularly expose to the Greek private sector. But the much bigger concern is contagion to the other peripheral economies, including Italy and Spain. French and German bank exposure to the debt of Greece, Ireland, Portugal, Spain, and Italy amounts to EUR 841bn, or about 95% of their capital and reserves. It is concern over these exposures that have led to a squeezing of the wholesale funding market for banks in core countries. The on-going issue is that it remains unclear by how much ECB is willing to buy the periphery sovereign bonds. The ECB’s earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB’s German board member, resigned from the board in protest. Indeed, the intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority.

The disappointing growth environment suggests that, unless fiscal tightening is augmented, governments will likely miss their deficit and debt targets in the coming years. This calls for politicians to make some tough choices, in both the core and the periphery area. In the periphery, governments need to be willing to step up tightening efforts in a growth environment that is already weak. This would trigger further growth weakness, but still lead to an improved deficit path than would be seen in the absence of the additional measures. Meanwhile, the truth is that a much integrated Euro banking system built on a single currency will bring down everybody in the continent, once Euro is broken down. The question is whether the German public can be convinced of this argument. The longer it takes for the German public to realize this, the cost of stabilizing the Union will continue to rise. It has reached a level that might now require US and Asia to step in. US Treasury Geithner’s unprecedented participation to this week’s Ecofin meeting and calls for support from BRIC countries might be the start of an unusual cooperation.

In the near term, the best that can be expected is that one way or another Greece secures its next tranche of bailout finance and that Euro area governments ratify the new powers of the bail-out facility, the EFSF. Neither outcome is likely to be settled until month-end. Thus uncertainty could well persist into early-October. Indeed, ECB's Nowotny said that he is worried about possible delays in the approval of EFSF 2.0 and said that political agendas are weakening Europe's crisis response. The good news is that Spain became the latest member to approve the 21 July amendments, now joining France, Italy and Belgium. In the mid-term, to prepare for the scenario like the Leman collapse, EU leaders have to do more, particularly they need to prevent a systemic bank run. It would be against the best interests of the EU to allow these countries to collapse and drag down the global banking system with them. A possible solution is to have the expanded EFSF protect bank deposits and to have the IMF recapitalize the banking system. That would help these countries to escape from the trap in which they currently find themselves.  In the long-term, Eurobonds are still the correct project to execute, though it is subject to a high degree of skepticism within Germany, the country whose support is a prerequisite before any serious discussions can get underway.

Put in all together, policymakers in US and EMU are approaching an important juncture as they grapple with growth disappointment and major fiscal challenges. Monetary authorities globally have indicated a shift to a more accommodative stance. Asian central banks have indicated a pause in their rate-hiking cycles (South Korea, Malaysia, Philippines and Australia). In addition, China’s CPI for August fell to 6.2% from July’s peak of 6.5%. Also, Brazil announced a 50bps cut in interest rates. Given the gravity of the European crisis, the ECB has indicated that it is prepared to adopt a more dovish stance.  The upcoming FOMC meeting and the minutes from the RBA and BoE are likely to reflect more dovish sentiment among central bank policy makers. In the wake of some still-lacklustre Sept US regional manufacturing surveys and continuing disappointment on jobs data, the FOMC is likely to maintain a cautious theme in its 21 September statement, acknowledging the downside risks to growth. Housing data out in the week ahead are likely to confirm that the sector remains in the doldrums. The Fed is likely to tweak policy at the upcoming meeting, extending the duration of Treasury holdings on the B/S, rather than making a full-blown announcement of further QE. A further option would be to cut interest rates on reserves (IROR) to zero from their current 0.25% level, but this move would have little real impact.

X-asset Market Thoughts

On the weekly basis, global stocks climbed 2.92%, with +5.32% in US; +2.51% in EU; +1.61% in Japan and +2.19% in EMs. Elsewhere, 2yr USTs stayed flat at 0.165% while 10yr added 13bp to the 2.05%. Yields fell across the Euro area periphery. Greek, Spanish, Irish, and Portuguese 2yr yields all fell 86bp, -4bp, -32bp and -13bp, respectively. The 3M Euribor-OIS fell 8bp to 75bp. Brent crude dropped 0.5% to $112.22/bbl. However, the spread o WTI remains at unusually high ($25/bbl). The USD gained 0.5% to 1.3795EUR, but weakened 1.04% to 76.8JPY. CRB dropped 1.4% to 329.6.

Looking forward, as global growth indicators have deteriorated over the last several weeks, investor attention has lurched between the concerns surrounding Europe and those confronting the US. The recent steps taken in Europe during recent months and to a lesser extent in US are directionally positive, but not yet sufficient to resolve the sovereign debt crisis, which is threatening the banking system and the real economy. Heading into the FOMC, markets have tried to stabilize, but return volatility is likely to remain high given political and economic risks, pressuring USD-funded carry-trade strategies. Thus, investors should maintain defensive, given further market rioting. A resolution will be needed before we move to an O/W in stocks and commodities.

That said, as a forward-looking equity investor, my focus is more on timing --- when to look across the valley of economic weakness and get positioned for the next upleg in earnings/activity, and thus a rally in prices.  I think earnings remain the key to the outlook for equities, with stock market multiples likely to move in the direction of earnings. Corporate earnings have had several strong tailwinds since the recovery began, both on the revenue and cost front. The rebound in global economic activity provided a boost to revenue growth, while subdued unit labor costs, low interest rates and restrained capital spending helped bolster profit margins.  Looking ahead, the key risk is to corporate top-line growth, as labor and interest costs will remain well contained. According to ML, the 2011 global EPS forecast has fallen from 15.1% to 13.5%, while 3M ERR ratio has fallen from 0.80 to 0.76. This is the seventh consecutive month the 3M Ratio has fallen and shows no sign of troughing as analysts continue to trim earnings forecasts for an increasing proportion of stocks across the world. In addition, global broker optimism (the average of all Buys, Holds and Sells) reached levels not seen since the Tech Bubble in 2000. This bullish bottom-up sentiment is at odds with slowing macro data, suggesting that this is not the right time to bet on market rally.

However, equities valuations appear attractive. The trailing PE ratios also suggested markets have already discounted a decline in profits in the year ahead. The global trailing PE is roughly 12.7x, which is a nearly 30% discount to the median since 1970. By extension, a 30% decline in global earnings would still leave the global PE ratio at its historical median. The global 12M FWDPE has slipped to just 10 (10.6xPE and 1.6xPB) following the equity market’s latest setback. The forward PE is more than 35% below its post-1990 median (based on IBES forward earnings), so there is a considerable cushion for earnings downgrades. Indeed, if forward earnings contracted by 20% instead of growing by the 13% that analysts expect, then the forward PE ratio would still be modestly below its historical median. Historically, when the global PE was previously in the 10-11x range, MXWO averaged 28% in the next 12 months, and when the PB was in the 1.6-1.8x range, the index averaged 17% (data since 1988).

The Expected G4 Ramp-up

Most recent US data highlight weakness. Initial jobless claims for the week of Sep. 10 increased 11K to 428K and the 4WK AVG increased 4K to 420K,  both the highest reported since June. The preliminary September consumer confidence reading from the UoM (57.8) retraced only about 1/4 of the August plunge. And the expectations component, the better indicator of consumer spending, edged lower and is running below its trough during the recession and at its lowest level since 1980. On the manufacturing side, both regional manufacturing surveys in hand for September show declines in both new orders and shipments, a warning that manufacturing IP may slow sharply soon. Empire State (-8.82 vs. -4.00 expected) and Philly Fed (-17.5 vs. -15.0 expected) surveys fell WTE, although total factory IP rose 0.6% in July and another 0.5% in August. Clearly growth data have been a major disappointment and with US UNE rate above 9%, the case for a monetary policy response is powerful. But inflation has continued to run fairly hot relative to the Fed’s objectives.

With the global recovery still struggling, policymakers are being forced to delay the handoff to the private sector as the engine of growth. Fiscal policy has reached its limit; indeed, it has either become a sizable drag on activity (UK, EU) or a source of concern with regard to the need for eventual tightening (US, Japan). In US, President Obama’s USD447bn (3% of GDP) proposal for renewed stimulus is already facing vocal opposition in Congress. The limitation on fiscal policy leaves a heavy burden for monetary policy. G4 central banks are expected to  ramp up their unconventional policy measures within the next few months --- 1) ECB’s government debt buying program; 2)  BoJ’s asset purchase program are already in action; 3) Fed to extend its balance sheet duration at next week’s meeting and 3) the BoE to expand its QE by early next year at the latest. In EM, the timeline for policy normalization has been pushed back. In whole, global monetary policy will remain unprecedentedly easy well into next year at least.

That said, global inflation rates are still high on a yoy basis even as the sequential rates have fallen sharply. This is true for both headline and core inflation rates. In US, CPI increased +3.8% yoy in August, and core CPI was up 2.0% yoy as well.  US CPI has increased at 2.7% yoy over the past 6 months and its persistence stays in the face of moderating commodity price pressures. Euro area headline (2.5%) and core inflation (1.2%) remained unchanged in August. In comparison, 3M DM inflation has fallen sharply, from 4.5% in March to just 1.1% as of August, and from 8.1% as of January in the EM to 5.5% in August. With 3M run rates slowing and the base effects from the run-up in inflation late last year beginning to phase out, the yoy inflation is sure to move down materially in the coming months. But core inflation more complicated.  In EM, there are direct links between commodity prices and wage and underlying consumer price trends that will put downward pressure on core inflation. But there is little to no evidence of this pass through from commodity prices in DMs. Still, the generalized easing in inflation pressures is no doubt a welcome relief to central banks. In contrast to the widespread slowing in global inflation, inflation in India continued to accelerate in August. Headline inflation printed 9.8% yoy significantly higher than July's 9.2% print and slightly HTE. Core inflation also is accelerating both in year-ago and sequential terms. The data calls for the RBI to hike 25bp this Friday.

What Credit has Priced in?

Despite the announcement of t USD447bn jobs plan, UST yields have not risen. This is probably because of the muted success that previous policy measures have had, leaving investors doubting the effectiveness of another round. The sharp fall in 10 yr UST yields (-185bp to 2% sine Sep 2008) looks eerily similar to the JGB market after the 1989 Great Crash, and many have started to wonder if the U.S. is following in the footsteps of post-crash Japan. Interestingly, US stock market seems to have been tracking the post-crash Nikkei closely. However, there are several key differences between the two markets. In Japan, the stock market crash occurred in 1989 when PE ratios were >60x, and the stock market had to spend the next two decades working off the excess. Second, falling prices have kept Japanese nominal GDP flat since the early 1990s. A protracted period of deflation is much less likely in US. Finally, in Japan, the B/S recession occurred in the corporate sector, which forced companies to minimize debt rather than maximize profits. In US, however, the B/S recession has taken place in the household sector, while the corporate sector is in fine shape. This explains why the corporate sector profit recovery has proceeded at lightning speed and companies have been able to push margins to record highs on the back of soaring productivity, subdued wage gains and a swollen pool of unemployed workers. Going forward, companies will try to sustain their margins by squeezing out more productivity growth at home and expanding their operations overseas.

Across the ocean, I think the likelihood of Euro bond within this year is low. The key reason is that the recent German constitutional court just ruled that any pooled liabilities will be illegal without a referendum by the public. So we need voters to agree for each individual EU countries and it is hard to see this would be obtained at current environment. Probably it is easier to kick Greece out rather than issue an Eurobond.  But I have discussed the pros & cos above. In addition, Moodys also said they will rate the Euro bond at the lowest country weighting. Thus unless the Eurobond is funded entirely by Germany, France, Denmark and Netherlands, Eurobonds are unlikely to get AAA unless the rating agency change their mind again. As a result, I expect the Europe’s debt debacle will produce a nontrivial negative shock to EMs via both trade links and reduced credit flows. In short, the impact of the European debt crisis on EMs can be split into two channels: financial (banking) and the real economy. Emerging markets’ bank exposure to European banks or troubled nations’ debt is not material, so the direct financial impact should not be very large. However, the indirect links are substantial. For example, some developing nations have received massive inflows from G7 banks in general and European banks in particular. These inflows are at risk as European banks freeze their lending activity and repatriate capital. Brazil is the most vulnerable on this front as it has received USD485bn in inflows from G7 banks, of which USD350bn is from European institutions. Central and eastern European economies are the most at risk from Europe’s credit crisis, given the heavy involvement of European banks in the region and their trade links with the Euro area. Meanwhile, the biggest impact on Asian emerging economies will be via global growth. The share of Chinese exports going to the EU is almost 20%. In fact, the EU is just as important a trade partner for Asia as the US. and a renewed contraction in Europe would pose a material risk to Asian exports.

The question is what has been priced in? I think credit market is a good indicator to read as credit is very cyclical and is well correlated with economic data. Historically spreads and ISM numbers tend to be well correlated.  Given the latest ISM (50.6), the model implied iTraxx X-over spread should be around 840bp vs. current level at 717bp and the historical level at 517. It shows that at current levels of ISM, today’s spreads are indicating a relatively balanced risk and reward.  Another way is to look at what credit indices are pricing in terms of default compensation. Both IG indices (Main and CDX IG) and HY indices (Crossover and CDX HY) currently pay more than the corresponding worst case 5yr default scenario seen in history. In particular, X-over is pricing 45% of defaults at 40% recovery and even at 0% recovery, which is the most conservative one could get, the X-over is pricing in a 5-year cumulative default rate of 30%. This compares with the worst case 5-year default rate for HY of only 31.5%. In addition, it’s also worth pointing out that the crossover index is generally higher rated than overall HY. This highlights the potential downside if the economic scenario or the systemic risks get much worse. In addition, all indices are pricing in a much worse implied rating compared to their actual ratings, given the additional MTM compensation over and above default compensation.

China Awating the Turning Point

From a big picture perspective, Chinese authorities have been very effective in their development strategy. They spent the last two decades forming policies to encourage the country to become the world’s manufacturing facility. The advantage of becoming the global manufacturing hub is that it allowed China to utilize its less skilled population, develop new expertise, acquire technology, and build necessary infrastructure. It also allowed China to capitalize on the willingness of advanced economies to over-consume (especially when supplied with cheap financing from China). However, China’s success at dominating global manufacturing has contributed to global imbalances. Specifically, the flipside of a permanent string of Chinese CA surpluses, is deficits and rising indebtedness in the DMs. Unfortunately, the latter has now reached a tipping point. This poses a dilemma given that China’s development process is reliant on consumption in the West. There are also concerns about debt levels in pockets of the Chinese economy, albeit the overall economy still has limited leverage. With developed-world consumption no longer increasing rapidly, China needs to shift its development strategy.

That said, market is still waiting for the confirmation of inflation coming down. Though CPI for August fell to 6.2% from July’s peak of 6.5%, investors are watching for additional 1-2 months of data to confirming the trend. This is because a policy turning point is dependent on a declining trend of domestic inflation. Historically, equity market’s infection point always comes at this stage, range from policy easing to liquidity easing. However, the timing is subject to several variables – 1) economic cycle;  2) policy cycle; 3) external shocks. Under the similar investment environment in the past, sectors like Property, Finance and F&B outperformed given their sensitivity to the interest rates and the stable business fundamentals for the latter. Upstream and Mid-stream like Mining and metal, Chemical, Home appliance tend to be underperformed due to still weak demand and margin squeeze. 

Valuation wise, MSCI China is now just 1% above 2008/09 lows. A share is once again standing at 2 STDEV below trend, a level that has historically heralded major market bottoms. Unless the economy enters into a deep slump, I expect China market to outperform, given its growth potential. Chinese A shares have little correlation with global bourses due to the country’s capital account controls. In other words, this asset class provides a “safe haven” amid global volatility. Earning wise, 1H reporting season has just wrapped-up. Despite market correction, 1H result was strong with MSCI China index reporting strong revenue and earnings growth of 27% and 23.4% yoy, respectively.  Ex-financials earnings grew by 16.5% yoy.  Inflation pressure did not have a large impact to margin and most firms were able to pass much of it through. Banks had stable NIM while market ex-financials EBIT margin was down only 1% yoy to 11.4%.  In 1H11, MSCI China companies have secured 52.5% of the full year earnings estimate.  Banks, utilities, and property are running well ahead of estimate and we are likely to see earnings upgrade for these sectors. In A share, revenue and net profit show similar pattern, +26.4% and +22.7% yoy. If looking for concern, the 44.3% declining of cash flow per share is worth for attention……Lastly, regional wise, MSCI China is now traded at 9.5XPE11 and 19.1% EG11, CSI 300 at 12.4XPE11 and 24.4% EG11, and Hang Seng at 9.8XPE11 and 22.9% EG11, while MXASJ region is traded at 11.2XPE11 and +9.7% EG11.

Thinking ahead of Currency

Last week, market focus remains on Euro zone developments, although it is noteworthy that another round of unfavorable events, including ratings downgrades to several French banks, further USD funding stresses, and weak European economic data, failed to put any sustained downward pressure on EURUSD. That by no means indicates that downside risks to the currency pair have dissipated. An important event to note here is that ECB announced that it will provide additional USD funding to the Euro area banking system in coordination with the reactivation of a USD swap facility with the Fed. In terms of specifics, the ECB will conduct three separate USD liquidity operations with maturities of approximately three months each, in full allotments (i.e. as much as the banks demand) and is designed to cover banks funding needs over the end of this year.The Fed's USD swap facilities with other central banks were established and expanded during the financial crisis in response to similar pressures in the funding markets, where foreign banks were unable to obtain sufficient amounts of USD funding in the interbank lending market. When that occurred, many financial institutions turned to obtaining the USD funding they needed in the FX forward market, which had several consequences. Simply and most importantly for the FX market, the additional demand for USD coming through the FX forward market tended to put upward pressure on the spot USD. In addition, that demand resulted in dramatic skewing of the cross currency basis swaps, a condition which has become more prevalent recently with the latest round of stresses in European financial markets generally, and among European financial institutions in particular.

Looking ahead, it is apparent that the more prominent speculation and concern that Greece would not be awarded its next tranche of EU/ECB/IMF aid in time to meet its next round of debt servicing payments, or the more extreme speculation that it would otherwise be cast adrift from the rest of the Eurozone, has clearly subsided from the levels that prevailed at the beginning of this week. Another issue is potential reserve manager demand for Euro area debt, and by extension the EUR itself. There have been multiple press reports this week about possible BRIC purchases of Euro area sovereign debt, including the possibility that this will be a topic of discussion at a separate meeting of BRIC officials on the outskirts of the upcoming IMF meetings in Washington. In addition, the underlying LT theme of reserve manager USD recycling remains very much in place. So in terms of a long-term strategy of EUR accumulation--or USD diversification, the other side of the same coin--buying EUR-USD with a 1.3500 or 1.3600 handle this week is more advantageous than those purchases above 1.4000 which took place as recently as this past summer. Interestingly, aggregate USD positioning turned net long for the first time since July 2010. Aggregate USD net positioning was 861 (1-yr z-score = 2.74) from -5.9bn in the previous week.

In the week ahead, Fed is expected to announce operation twist on Sept 21, likely followed before Thanksgiving by a loud "shout" (communicating their commitment to ultra-low rates beyond 2013). QE3 will be on the table if, as we expect, there is no inflection in the US data by 1Q12. Such futile and reckless hyper-activity cannot augur positively for  USD. Additionally, the downside risks to the Euro are heavy. All eyes will remain focused on policy actions from Europe to address the sovereign debt crisis, with growing fears about the spillover to the European banking system and funding markets. A Greek debt restructuring is possible in 1H12, if not earlier, with its impact on financial channels capable of pushing a majority of Eurozone countries into recession. If the history of financial crises has taught us anything, it is that there is no such thing as an orderly restructuring.

Good night, my dear friends!