According to the latest monthly survey of big fund managers by Bank of America Merrill Lynch Global, Europe may have pulled itself back from the brink of disaster.
But fund managers now, more than ever, are convinced Greece will default.
And the same fund managers are now holding more cash than they have done for a couple of years.
That’s another sign they remain concerned about the stability of Europe.
And also why they, like everyone else, must be concerned at the latest delays and impasse over an agreement to start the torturous process rebuilding trust and the financial health of the eurozone.
The survey, released overnight, reveals big fund managers aren’t as concerned about Europe’s financial wellbeing as they were in September.
The survey was done last week (October 7 to 13) when it seemed as though the eurozone and EU were starting to get their act together ahead of Sunday’s leaders’ summit in Brussels.
That’s no doubt due to all those rather flimsy stories about how Germany, France and the eurozone generally (well those with AAA ratings) were getting serious about dealing with the looming Greek default and the impact that and other downgrades would have on European banks and their weak capital positions.
The survey was also conducted before this week’s public tooing and frooing between France and Germany over the agreement that everyone wants from Sunday’s meeting.
President Sarkozy went to Frankfurt (his second trip to Germany this week) to talk about the agreement. Chancellor Merkel was involved in talks at a high-powered evening of opera, dining and chit chat.
Further talks are due to be held on Saturday between the two leaders in an attempt to try and settle differences between the two countries before Sunday’s summit.
But after more discussions Thursday, European time, reports emerged that a second leaders meeting would now have to be held no later than next Wednesday to finalise an agreement.
Chances of an agreement on Sunday evaporated after it became apparent that Germany and France couldn’t agree on boosting the European Stability Fund, an essential part of the deal as it would give the EU the firepower to convince markets that sovereign debt and the areas banks would be defended.
So now we face a few more days of mad speculation that is becoming tiresome.
European markets followed Asian markets lower overnight. US markets fell, then rose on some reasonable economic news.
Commodities fell, with gold off 1.5%, oil lower and copper down nearly 5.5%. Despite that the Aussie dollar recovered to end around $US1.265.
The reluctant confidence shown in the latest Bank of America survey would have evaporated if the poll was taken this week, instead of the week before.
It was also conducted before Moody’s warned that France’s AAA rating could be put on downgrade notice in the coming months, and before the downgrading of Spain’s rating, also by Moody’s and other downgrades of banks in Spain and Italy by Standard & Poor’s and Fitch last Friday and earlier this week.
Only 61% of fund managers see European sovereign debt as their number one concern, compared with September’s figure of 68%.
It’s not much of a change, but it’s an improvement. But looked at another way, big global fund managers are still very gloomy about the outlook for Europe’s debt crisis.
The improvement is more sharply defined when you look at some of the other findings of the October survey.
For example, only 7% of managers would like to be underweight in European stocks in the next year, down from 40% in September. Now that’s a more significant improvement.
And banks, which are normally shunned when investors mention Europe’s debt problems, are back in favour, sort of.
While they are still wary, fund managers have moved back into financials in a tentative fashion.
Managers are now 34% underweight banks globally, against 47% in September, while European banks, though lagging behind their peers, improved to 41% from 65% underweight.
That is no doubt based on the assumption that Sunday’s meeting will provide comfort and support for banks if bigger cuts are demanded on Greek debts, and provisions lifted for bigger losses on Spain and Italy.
Or rather, there is sufficient support promised (by way of capital and debt protection) for the banks to write down their holdings of troubled sovereign debt to more realistic levels.
Gary Baker, head of European equities strategy at Bank of America Merrill Lynch research, said in a statement, "Europe appears back from the brink. But it seems investors are waiting for the all-clear from both Europe and emerging markets before committing cash".
Much of the pre-summit stories of deals and agreements have been fantasy, and investors have chosen to believe them because they have nothing else to fall back on, except fear and trepidation.
But on one issue there is virtual agreement: most fund managers are agreed on the likelihood of a Greek default. Nine out of 10 are expecting a default, with the majority foreseeing this before April 2012.
Greek creditors have already agreed to a voluntary 21% write-down on Greek debt, and the looming question for Sunday’s meeting is whether Europe can construct a defence of the euro and the EU banking system to handle such a collapse.
The hope is that Europe can
