Libyan Rebels Approach Gaddafi Hometown, Portugal Remains in Crisis

The weekend has been heavy in terms of activity, and Monday 28^th is more active than a typical first day of the week would be.

In Portugal, it is expected that the President will meet with party leaders in order to determine the date of the oncoming early elections, which will end the current parliament`s tenure two year before the legal term. The outgoing PM Jose Socrates has been insisting that Portugal does not need a bailout yet, since it remains in possession of enough cash to meet redemptions of Eur 4.5 billion bonds due April 15th. There seems to be some agreement among Portuguese authorities that June redemptions of a similar size pose a different risk, and the next election will probably take place that month in order to face the turmoil with a strong and responsible government in place. Yet, whether it is a good idea to place these two events in such close succession is up for debate, and this is reflected in the market reaction as well, where traders demand a yield of 7.66%, or a spread of 260+ for funding the government`s 10 yr borrowing. Spain seems to have escaped similar treatment for now, perhaps due to the ruling government`s commitment to bring the deficit back to 6% of GDP from 9.2% in 2010.

In Syria, where demonstrations have caused deaths and a massive outpouring of anger in the south of the country, the Assad regime has adopted a very measured approach, no doubt sobered by what is happening to the Colonel in Libya. Promises of widespread reforms are flying in the air, but since similar promises were made in the past too, and never fulfilled, it remains to be seen how credible the latest pledges will seem to the people. Still, the Arab Revolution is a real and serious threat to the survival of these regimes, and as Basshar Assad has proven himself to be a reasonably flexible leader in the past, there is some hope that that bloodshed of the kind seen in Libya or Yemen recently can be averted. From a trader`s point of view, Syria is a tiny country with only a limited economic role in the region, but its pivotal situation and role in the Arab-Israeli conflict make it an important component from a strategical point of view. In Yemen, after yet more clashes and protests, the U.S. ally Ali Abdallah Saleh is reported to have agreed to leave the country, but not immediately. His ruling party has also declared its support for him.

Finally, in Japan, there is worrying evidence that the nuclear crisis is getting deeper and harder to control, as reports of radiation leakage into the sea, and radiativity levels reaching up to 100,000 times the natural norms frighten the Japanese people. Authorities have declared it likely that the resolution of the issues will last for months, and an influential advisor to the PM has suggested that Japan be decentralized in order to avoid similar events when Tokyo is hit by an expected earthquake-tsunami combination sometime in the future.

In consequence of these developments, global stocks showed a mixed performance, while the USDJPY and AUDJPY pairs appreciated, and the Euro fell in reaction to Portugal concerns. Gold and oil were lower. This is probably due to the rapid advance of rebel forces in Libya this weekend, which brought them close to the Colonel`s birthtown, raising hopes that the crisis and the war may reach a conclusion earlier than expected. There is not much that can be said on this matter, since conditions are volatile, and it is difficult to predict what kind of surprises may be awaiting both sides.

Libyan FM Defects as Gold, Stocks and Oil Rise

Markets have been exceedingly resilient against the disappointing releases and difficult events of the past weeks, and as such releases become rarer, traders are displaying a great deal of enthusiasm about purchasing risk. Today is a bullish day although there is nothing particularly bright in the  political or financial news flow.

In Japan, "radioactive iodine-131 at a concentration of 4,385 times the maximum level permitted under law has been detected in seawater" near the Fukushima Daiichi nuclear plant today, according to the Kyodo news agency. The government is continuing to deny that the leaks constitute an immediate health hazard, but fears about the so-called recriticality are being voiced both in and outside Japan as the crisis drags on. 

Elevated radiation levels have been detected as far away as Britan and Switzerland, and some radioactivity has been detected in milk in the U.S. as well, although these levels are extremely low so far and do not pose any risk to people, according to official reports. Markets appear to have shrugged off the risk of wider contamination and seem to have settled for the viewpoint that the greatest economic and political impact of the leaks will be felt in Japan itself, with negligible results for global growth.

In Libya, Colonel Gaddafi`s foreign minister, and former intelligence chief, Moussa Koussa has defected to the U.K. after taking a flight through the neighboring Tunisia. There are signs that the Libyan leader`s regime is cracking from the inside, but the military situation remains inconclusive, so markets did not react strongly to the news. 

In the U.S., some focus is on the release of the list of banks that borrowed from the discount window during 2008-2009 - the most difficult days of the global financial crisis. The Fed will be releasing the identities of future borrowers after the passage of two years, in line with the Dodd-Franks Bill on banking regulation passed last year. If anything, this should make Fed officials a bit more cautious while bailing out financial firms, since from now on they may be accused of corruption and collusion of interest once the details of their past actions are made public. However, we are skeptical that the impact will be as strong as many would like.

Markets outside of the U.K. and the Eurozone were optimistic today, in anticipation of a favorable unemployment report. Most Asian markets were higher, as were gold and oil, and EUR USD appreciated while USD JPY fell. In Europe, focus remains on the uncertainties surrounding the Eurozone sovereign debt issues, the resolution of which is likely to stretch years into the future. Some concern is caused also by the ambigous position of the Irish government vis-a-vis their creditors. How much private lenders of the government will have to swallow in losses is an issue that is still haunting the Eurozone, suppressing the Euro currency even as the rest of the world retains a rather strong sentiment towards risk.