Is Germany Finally About To Do What It Takes To Save Europe?

Since the European economic crisis began, Germany has widely been viewed as an impediment to recovery.

Monetary stimulus seems to violate the German constitution, and the government's view is that all countries across the eurozone should pursue fiscal discipline and German-like structural reforms.

This famous Venn diagram from @pawelmorski basically explains the situation.

Eventually, the ECB was able to address a critical component of the crisis (against the objections of the Bundesbank) when it established the OMT program, which promised to backstop government bond markets, provided said governments were willing to pursue reforms.

This program (which has never actually been used by anyone) was announced last July, and since then government borrowing costs have declined precipitously, nicely easing financial tensions across the eurozone.

But the real economy still is terrible, and the Germans have seen little impetus to do anything other than advise ongoing austerity and reform.

If you want to know why Germans don't see much reason for concern, you just need to look at this chart. Things are great in Germany.

Societe Generale

But with the crisis ongoing, Germany's government is apparently changing its tone.

German magazine Der Spiegel (via @spbaines) reports today that fiscal stimulus might finally be on the table.

But a new way of thinking has recently taken hold in the German capital. In light of record new unemployment figures among young people, even the intransigent Germans now realize that action is needed. "If we don't act now, we risk losing an entire generation in Southern Europe," say people close to Schäuble.

Berlin is making an about-face, even though it aims to stick to its current austerity policy. The German government has stressed budget consolidation and structural reform since 2010, when Greece was on the verge of bankruptcy. Berlin has been arguing that this is the only way to instill confidence among investors in the battered debt-ridden countries and help their ailing economies recover.

Meanwhile, tomorrow Germany and France are expected to unveil a "new deal" to address youth unemployment, which is one of the most well-known sub-crises within the overall economic crisis.

There have been several false dawns in Europe since the crisis began.

But this might be another moment. Investors are getting excited about Greece. There are signs that the economy could surprise to the upside. And now there's talk of investment and stimulus out of Germany. Watch this space.

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ANALYST: We Are Seeing A Recalibration Of The Cost Of Money

REUTERS/Shohei Miyano

Part of the reason people are nervous about Japan is the potential for a disturbance caused by an increase in long-term government bond yields.

The fear is that ultra-aggressive easing will create inflation, leading to an interest rise, creating havoc for banks who own so much government debt.

And in the US, all the concern is about the so-called "Taper" the wind-down of QE that may begin this year.

In an email to clients, SocGen's Kit Juckes writes:

 What we are seeing is a minor re-calibration in the cost of money in both the US and Japan, with a feed-through to the rest of the world. In both economies real yields are negative and  in both, attempts at reflation are under way. Can Japan survive a 1.5% 10yr yield? Can the US survive a 2.5%yield? Of course they can. That's not the issue. In Japan's case the question is what increased yields and increased vol to the p&l of bank portfolios, and in the US the only question is what happens to asset markets pumped up by the hydrogen-like effects of sub-2pct 10yr yields.

...

 In the longer run, we'll re-calibrate to slightly higher (but still low) yields; we will go on watching mediocre growth, and low/no inflation. Equity folk  will doubtless go back to talking about the Great Rotation  into stocks. But even if you're a super-bull, that just means you should seriously consider stocks - and credit - in September. That's when they run the St Leger, after all.

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Japan Has Stopped Crashing

For now, Japan has stabilized.

After a 7% crash on Thursday, followed by weakness on Friday and Monday, Japan has stabilized.

After starting down by over 1% in the early going, Japan is up modestly in early Tuesday trading.

The Nikkei has been remarkably volatile lately, but for now, some peace.

Nikkei.com

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SOCGEN: Traders Are Talking About Greece Again, But In A Different Way Than They Have Been In Years

If you haven't seen it, then you should check out a chart of Greek borrowing costs. You might do a double take. Quietly, demand for Greek debt has jumped quite a bit, as the market feels that the country may have turned the corner for real this time.

Here's a 6-month chart of yields on the Greek 10-year bond.

In SocGen's latest "On Our Minds" note, strategist Michala Marcusen says that Greece is one of the top things that clients are asking about right now.

Marcusen writes:

TOP CLIENT QUESTIONS WILL 2013 BE THE LAST YEAR OF GREEK RECESSION… …IS MORE DEBT RESTRUCTURING IN THE PIPELINE?

An upgrade by Fitch to B- from CCC on 14 May, praise from the EU Commission on continued progress and first hints that the spill-over from Cyprus was not as bad as feared have built hope that 2013 – as forecast by the EU Commission – could be the last year of recession in Greece. Further boosting hopes, was the news that early bookings show that 17 million tourists are expected to visit Greece after 15.5 million last year, attracted by lower prices.

The next key data to watch is May PMI (due 3 June). Although, still deep in contraction territory, the 21- month high of 45 observed in April (up from 42.1 in March) has helped underpin the more hopeful mood. The EU Commission and IMF forecast GDP growth at -4.2% in 2013 and see the first year of positive GDP growth since 2007 in 2014 at 0.6%. Our own forecasts, however, are considerably more downbeat with growth forecast at -10.3% in 2013, -4.2% in 2014, -0.6% in 2015 and only turn positive to +0.9% in 2016. On the short-term dynamics, we note that the -5.3% yoy decline in GDP in Q1 combined with an already weak end to 2012, offers a negative base effect. By our estimates, the remainder of the year would have to see significant positive growth to meet the Commission/IMF forecasts. With leading indicators still in recession territory, this seems challenging.

Bottom line: Things are improving, but clearly they are still tough.

To us the biggest story is that Greece as a positive story is being talked about at all.

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Traders Are Getting Extremely Bullish On The US Dollar [CHART]

From Morgan Stanley's latest FX Position tracker note, more confirmation that investors are getting crazy bullish about the dollar.

USD long positioning surged into extreme territory over the past week. The move was broad based, with our clients, non-commercial IMM (international monetary market) accounts, Japanese retail, and global macro hedge funds all large buyers.

The surging shaded blue bar shows how extreme long USD positioning has become.

Morgan Stanley

As for why the US dollar is so loved these days?

It's a combination of Fed exit talk, the weakening yen, and cheapening commodities.

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