Roiled OATS Spread Panic in Europe and Opportunity Down Under

The European Parliament elections created risks and opportunities in Australia.

In today’s Fat Tail Daily, financial markets are having trouble digesting the European Parliament elections. They’re supposed to be incredibly unimportant. But they’ve created risks and opportunities right here in Australia.

Financial markets are having trouble digesting the European Parliament elections. They’re supposed to be incredibly unimportant. The European Parliament just rubber stamps what the unelected European Commission sends their way.

But the results managed to cause chaos in stocks and bonds. It even made the top story on!

So, what’s going on? And is there a profitable angle surprisingly close to home?

Over at Strategic Intelligence Australia, we were ready for this moment.

On the 15 March I wrote: ‘I believe the European Union elections in June may well deliver some serious financial market volatility akin to the 2010-2014 period.’

What sort of serious financial market volatility was that?

The sovereign debt crisis is the most relevant to financial markets and investors. If the EU is weakened, we may be back to the bad old days of 2012, when all markets were roiled by fear of a major financial crisis in the eurozone.

Sure enough, that’s exactly what happened.

The excellent financial Journalist John Authers sent out an alert in response: ‘The French Connection may not withstand this,’ it said.

Just like sub-prime and the pandemic, this crisis has its own jargon. Which we’ll all become painfully familiar with in coming years…

The OATS Spread is not one of those financial metrics you hear discussed very much. That’s good, because if people start talking about it, that’s almost certainly a bad thing. Like the plumbing in your house, you ignore it unless something goes wrong, and then nothing is more important.

So, the bad news is that the OATS Spread (the gap between the yields of 10-year bonds issued by France, known as OATS for obligations assimilables du Trésor, and German bunds) is back at the center of discussion. It’s just surged in a remarkable way.

The gap between French and German government bonds hit the highest level since the beginning of the pandemic.

It was such ‘bond spreads’ which gave the European Sovereign Debt Crisis their meaning between 2010 and 2018. Only, this time, it’s France at risk.

They measure how much more the French government would have to pay to borrow money than the German government. It indirectly tells you the risk of France doing something crazy, like defaulting on their debt or leaving the euro.

It also tells you how much bond prices crashed. Those losses are sitting on someone’s balance sheet. Perhaps a French bank that’s now in trouble. Just as US banks were last year, when they went bust because of tumbling US bond prices.

And so stocks dropped too. Especially the European banks. First on the EU election results. And then on the news of a surprise French election.

But does a roiled OATS spread really impact you? It certainly can.

A painful reminder

Back in 2018 I warned about Italy facing the same crisis. A populist Italian government was elected to take on the EU and European Central Bank. The bust up delivered the worst financial market returns since 2008.

So it does matter, a lot.

It was all papered over in the end, of course. And so the Italians elected an ever more eurosceptic party into government at the next election. But they’ve been suspiciously pro-EU and euro since too.

Much the same happened in the UK in September 2022. Which I didn’t predict. The eurosceptic free-marketeer Liz Truss came into power and announced large tax cuts. The UK bond market had a heart attack over the increased deficit. Much of the pension system almost went bust.

The Prime Minister was soon replaced by a Goldman Sachs alumni. As usually occurs after a bond crash in Europe.

So, none of this is new. It’s just that France is a lot bigger than the likes of Greece, which needed an actual bailout.

It’s also difficult to know whether the next French government will give in to the European establishment like all the others did.

The party leading the polls are described as far right, but their economic policies are rather far left. Will the ECB and EU approve?

Another new factor is that there seems to be rather a lot of “far right” governments in power across Europe these days. Does their combined pressure add some sort of weight?

I don’t know. But we’re going to find out the hard way. Because all of those governments were only brought back into line by the consequences of picking a fight with the EU: financial market volatility.

An opportunity in the making?

Europe’s crisis will be Australia’s gain. And not just because of our comparatively low debt to GDP ratio.

The most important result in the European Parliament elections was the decline in support for green parties. The European electorate has had enough of the energy transition.

Instead, voters came out in force for parties that have long supported nuclear power. They’ve been vindicated by Europe’s energy crisis.

The new Dutch government is planning on adding four new reactors to its existing one, for example. Even the party leading the polls in Germany is considering reversing the phase out of nuclear too.

But all this unexpected nuclear power needs a lot of uranium fuel. Preferable from a country not tied to Russia, which has a stranglehold on nuclear fuel supplies.

Can you think of one?

It’s only the latest shift in support of nuclear. Artificial Intelligence may be the most important one. It will create a big enough demand for baseload power to force the issue in favour of nuclear. And in favour of ASX listed uranium miners.

But nuclear is not the only industry which AI will unleash. My long-suffering friend Callum Newman has put the hard yards in. He identified which Aussie stocks stand to benefit most from the new tech. Find out more here.

Until next time,

Nick Hubble Signature

Nick Hubble,
Editor, Strategic Intelligence Australia

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

Source link