Who was first to blink? Why Germany of course!

The Spanish played a blinder in this mega billion game of bluff. They gambled on Germany not being willing to bail out both them and Italy should they default and they were right. By 13:20pm on Monday, despite the promise of €100m, the yield on benchmark 10-year Spanish debt was 23 basis points higher at 6.4%, while Italian yields were up around 6%, hitting week highs. It would appear that the sticking plaster doesn’t have enough sticky. Yields on safe haven bonds were also marginally higher, but not enough to prevent spreads widening, with German bunds up 0.015% at 1.331%, and UK gilts up 0.019% at 1.654%.

The yield on benchmark Spanish10-year bonds hit 7% on Thursday morning, a level which many analysts believe is unsustainable in the long term. Italy issued a total of €4.5bn of debt in three, seven, and eight-year bonds. It matched its issuance target but had to pay higher yields than last time. The eight-year bonds yielded a rate of 6.13% compared to 5.33% in the prior auction. The yield on the seven-year bond rose to 6.10% from 5.21% and three-year bonds rose to 5.3% from 3.91%. Ouch! Today, Spain; tomorrow, Italy; next? Slovenia – and loads of tiny East-European states that will jump on the bandwagon. Frau Merkel says free beer for all the workers.

Look at this table of ten-year bond yields (courtesy of Barry Ritholtz at The Big Picture):

Should anyone wish to commit financial hara-kiri, I can think of no better way of doing it.

Credit Suisse analysts have spent a couple of weeks on the ground in Asia talking to some 40 participants about the state of the metals and mining industry in the region (producers, consumers, traders, etc.). Here is a quick summary:

“Worse than 2008: Even considering the optimistic nature of human beings, our discussions suggest a significant loss of growth momentum, leading to a continuously challenging environment, especially for steel makers, and to a lesser extent, mining companies, driven by:
(i) compressed Ebitda margins,
(ii) weak demand for finished products, and
(iii) surplus steel capacity, which are all likely to remain in place in the mid-term.
Asian risk appetite has fallen and consensus is that structural problems faced by the Chinese industry will continue, regardless of a potential breath of air from an expected minimum RMB 1 trillion stimulus package, which would bring temporary relief at best.” (Sober Look)

An estimated 14% of the ETFs registered for sale in Europe are under review for profitability reasons by fund promoters, potentially placing them on the death list, according to Detlef Glow, Lipper’s head of Europe Middle East & Africa research. As we have said before be careful; be very careful.

Look at the following 30 year chart (see below). It presents the XAU Gold Mining Index measured in terms of gold, not dollars. Gold stocks have never been this undervalued before. We’ve had a 12 year bull market in gold, but we’ve also had a 15 year bear market in the mining shares:

Trail commissions on the Invesco Perpetual corporate bond, Invesco Perpetual global bond, M&G corporate bond and M&G strategic corporate bond have been cut by Skandia. On fund based commission the trail will be reduced by 0.1 per cent.  Doesn’t sound much but it’s at least 20%!!

Anthony Bolton’s £483.5m Fidelity China Special Situations investment trust has reported significant underperformance, in its second annual results. The trust has reported share price falls of 26.4 per cent in the year to end-March, while it also lost 18.5 per cent in net asset value terms. This compares to the trust’s benchmark, the MSCI China index, which fell by just 6 per cent over the same period. We did tell you…..

The next ‘Rant’ will be 29 June as I shall be on holiday in the Algarve next week. I gather that the roof has blown off Faro Airport. Probably a fermenting cataplana, I remember what the last one did to me.

Regular naps prevent old age, especially if you take them while driving.

Have a good weekend.

DAVID COWELL