James Mackintosh

Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment. Read more

Uncertainty over the outcome of Italy’s election has strengthened sterling as its safe haven status appeals, in spite of Moody’s downgrade of the UK. James Mackintosh, investment editor, examines the prospects for more of a bounce in sterling.

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Politics is back on the agenda for investors. Spanish and Italian bond and stock markets took a tumble, reacting to a spreading slush fund scandal in Spain’s ruling Popular party and rising support for former Italian prime minister Silvio Berlusconi. James Mackintosh, investment editor, asks if a retreat from the eurozone’s periphery will herald a shift in market paradigm

James Mackintosh

Lee Buchheit is a man worth listening to. The Cleary Gottlieb lawyer wiped €100bn off Greece’s debts when he restructured the country’s bonds at the expense of the private sector, in just the latest in a long line of sovereign defaults he has overseen.

Now he’s airing his thoughts on the options for Spain and Italy, jointly with Mitu Gulati of Duke Law School – and rather bravely, he’s due to speak about it in Portugal next week.

His key message is that Spain is running on borrowed time, and should get on with a Uruguay-style debt reprofiling as soon as possible, extending maturity dates on bonds far into the future but continuing to pay interest. Read more

James Mackintosh

Commentators have been having fun at the expense of the credit rating agencies recently, pointing out that after their downgrades markets have been upgrading various securities. It’s tempting to think the same after Moody’s two-notch downgrade of Italy today, with the euro up very slightly at $1.22 (although still close to a two-year low), while the 6 basis point rise in yield on Italy’s 10-year bonds is hardly dramatic by recent standards.

But that is to ignore the place where the downgrade really has power: Italian inflation-linked bonds. Moody’s actions will mean that Italian linkers fall out of the main Barclays index, which has stricter conditions than the main indices for nominal bonds.

Billions of euros of tracker funds will now have to sell Italian linkers, one of the biggest linker markets, eliminating a big source of demand – and showing what could happen if two of the three big rating agencies downgrade Italy to junk, knocking it out of the nominal indices. Read more