October 14, 2013

When Angela Merkel received a resounding victory in the German polls last week, she stated at her acceptance speech that she would stay the austerity course:

"We made very clear today that nothing will change in our Europe policy. We carried out this election campaign according to our convictions, and we will continue this way.

This is, perhaps, the most important message to people. The Europe policy is part of our core values and will always be, and it will be continued in the same spirit."

This declaration was not a surprise to Europe, but it definitely reminded all of the southern European states why they have been so adamantly against the German chancellor. Merkel has not offered the financial relief to the cash stricken countries, that many of them would like to see their wealthiest neighbor provide. However, by standing up for the German government's checkbook, Merkel was also standing up for the European sovereign debt holders around the world. With Merkel steering the European ship, cost will be contained and the financial house will grow stronger. This in turn should make Europe's sovereign debt more attractive. The Italian and Spanish Government 10 Year Bonds are yielding 4.3-4.4%, which in a 0% rate environment coupled with the piece of mind that Merkel will keep austerity going provides some very attractive yields to foreign buyers. By contrast, the US Utility Sector is yielding slightly below 4% while the US 10 Year Government Bond yield is at 2.6%.

In addition, the European zone's economy has started showing some life, posting its first positive GDP growth figure in the 2nd quarter since 18 months ago. The .3% growth figure was a surprise to economists.

ABOUT THE AUTHOR
Alexander Fleiss serves as Chairman and Chief Investment Officer of Rebellion Research Partners LP, a Global Macro hedge fund and financial advisory that invests across all asset classes and is ...