June 9, 2012 / 11:31 AM / 5 years ago

Braced for the worst, hoping for aid

LONDON (Reuters) - If risk-averse investors could grant two wishes for the coming week, they might choose to offer Spain a bank bailout and Greece a new government that keeps it in the euro zone.

Demonstrators protest against evictions inside a branch of nationalized lender Bankia in Madrid, June 8, 2012. REUTERS/Andrea Comas

But even if they occur, those events are unlikely to provide more than temporary respite in a regional crisis that continues to deepen and, despite policymakers’ best intentions, still looks several hard decisions away from being resolved.

A war-game element is coloring investment strategies, with concerns centered on how to position if a major nation were to get into a trouble or a big bank go under, and when the big guns from the central banks will begin to fire.

“One of the big risks we can see is the downgrade of another major sovereign, either Germany or the UK,” said Mouhammed Choukeir, Chief Investment Officer of Kleinwort Benson.

“Under this scenario the markets could say what is risk-free now?”

CENTRAL BANK RESCUE

While worries about debt, deficits and downgrades are ratcheting up, investors have been pinning more hopes on an eventual rescue via stimulus measures from the world’s major central banks.

This talk has eased some of the strains in European debt markets over the past week and helped world equity markets post one of their best weeks of the year.

The MSCI world equity index .MIWD00000PUS was set for gain of around 2.5 percent on Friday, the best rise since January.

“It’s a bit of a ‘buy and hope’ strategy,” Choukeir said. “It’s definitely not based on any action by the central banks but very much on the hope there will be some.”

Following a lack of action by both the European Central Bank and Bank of England in the past week, The Bank of Japan is not expected announce new initiatives either when it meets on June 14.

But there will be more interest in the quarterly meeting of the Swiss National Bank, also on June 14, as it comes under pressure to do more to curb the strength in the franc from safe-haven flows out of the euro zone.

A Reuters poll found no dissenters from the view that the SNB will leave its current target for Swiss interest rates unchanged.

But a significant minority of economists said capital controls may need to be imposed at some point to continuing capping the Swiss franc at 1.20 per euro.

“Wait and see will be the theme for the time being. Additional measures will be taken only if the attacks on the floor become vast,” said says Janwillem Acket, Chief Economist of Julius Baer.

‘Wait and see’ also sums up the prevailing mood ahead of the Greek parliamentary election on June 17, which has the potential to unleash major disruptions on the financial markets if it returns a government hostile to the country’s bailout agreement.

Another factor inhibiting trade is whether, when and at what level Spain will bite the bullet by seeking aid for its banks.

The week is also sandwiched by the two rounds of French parliamentary elections which are expected to see new president Francois Hollande’s Socialists poll well.

Hollande is due to visit his Italian counterpart Mario Monti in between the two votes, where they will likely push for more pro-growth measures as a solution to the euro zone’s crisis, in the face of strong German opposition.

An Italian bond auction on Thursday will provide the latest test of investor appetite for peripheral euro zone.

U.S. BANKS, FED EYED

In what will be a fairly light week for major economic data, May inflation numbers for the U.S. on June 14, which should show a decline, could also at least prompt more talk about the U.S. Federal Reserve’s next move after Chairman Ben Bernanke moved to dampen hopes of policy action.

Bernanke told a U.S. congressional committee on Thursday the Fed remained ready to take action to help the U.S. economy but only in the event that current stresses escalated.

A bigger issue for U.S. financial markets is the possible announcement of a much-awaited downgrade by Moody’s Investors Service of many large U.S. banks.

The ratings agency had said in February it may cut the ratings of a clutch of major banks due to fragile funding conditions and the more treacherous macro environment. It has since said the change could happen this month, with speculation mounting it could be in the next week.

Morgan Stanley, Bank of America Corp (BAC.N) and Citigroup Inc (C.N) are all at risk of a downgrade to Baa2, but Morgan Stanley could be the most affected by a downgrade because more of its revenue comes from trading.

Editing by John Stonestreet

Our Standards:The Thomson Reuters Trust Principles.
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