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Maydays - John Redwood Comment

May 18, 2010

PanCOMMENT
18th May 2010

Maydays

Markets rallied strongly on the $1 trillion package to prop up delinquent states within the Euro area. The enthusiasm didn't last long.

That's because there is plenty to worry about. In India they are worried about how the authorities will have to raise interest rates to curb their lively inflation. In China they worry about how hard a landing the authorities are seeking after the explosive growth in property prices and bank lending coming out of the global Credit Crunch.

In Euroland there is all to do. It's one thing to arrange facilities and guarantees to reassure markets that in extremis the authorities can take care of the weak member states' borrowings. It's another to make the changes to the budgets of Greece, Portugal, Spain, Ireland and the others to bring their deficits under control and solve the underlying problem. These economies are very dependent on state activity. If they cut state spending without finding out how to stimulate a private sector led recovery they will find tax revenues remain poor and state spending stays obstinately high.

In the UK the new Coalition government has already added around £ 5billion to state debt, such is the pace of borrowing they have inherited. The pound has fallen about 5% against the dollar on their watch so far. We should expect plenty of news to emerge of just how bad the UK public finances are, as new Ministers wrestle with their debt charged inheritance, and as they seek to make the case of deeper and more urgent cuts in spending to tackle the large problem.

We have said of this year that returns are likely to be modest - the best is well behind us in last year's spectacular rally. Cash is still not very attractive as interest rates are low and may stay low for some time. We recommend staying out or selling any sovereign debt owed by weakly financed states like Greece, Portugal, Spain, and the UK. We also suggest avoiding equity in Euroland where growth is slow and may be damaged by the Euro crisis.
 

Regards,
Evercore Pan-Asset Team

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