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The market has done what nobody expected it to: Rally in the face of the Greek and French elections.Why is that?
In a note out today, Jefferies’ credit guru David Zervos think that Keynes is smiling in Europe, and that the market is pricing in a new era of stimulus.
The market reaction this morning makes sense when viewed through a countercyclical policy looking glass. As far as I’m concerned the European voters of France, Greece and Germany (in Schleswig-Holstein) all voted for a “political easing” of policy. This in turn will have a soothing effect on growth and balance sheets – but most importantly it will act as a stabilizing buffer during the post crisis trauma period.
This is possibly true.
Europe at the moment seems to be at a crossroads where it could either get much better or get much worse. As we argued yesterday, if Germany is willing to play along with this new “easing” trend (which is demanded by all voters except German voters), then what Zervos is saying sounds totally correct.
On the other hand, if Germany digs in, then things could get much worse, as the existing scheme (which is at least vaguelys table, if awful) could collapse.
Further complicating Zervos’ analysis is that there was chatter of a Spanish bank bailout forming today, and that seems to have provided a lift.
Anyway, this is the frame by which to evaluate the new ‘Merde’ (Merkel + Hollande) axis. Are the next moves towards bust up or are the next moves towards more easing? That’s all we’re interested in now.
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