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Flash: EUR breakup risks palpably rising – BMO Capital Markets

FXstreet.com (Barcelona) - According to Stephen Gallo at BMO Capital Markets, “The EUR break-up risks are still rising despite the fact that break-up risk premia are not being factored “into the price” in any major way: be it the CDS market, the bond market, the EUR, or the share prices of European financial institutions.”

“This is a major problem for investors and perhaps even policy makers too: the fact that asset prices (rather than the underlying longer-term picture) drive investor behavior, judgement and psychology for far too long after they have adjusted to some new piece of fundamental news.” Gallo warns. Back in early July of last year, asset prices did not reflect the presence OMTs.

They have since adjusted – quite appropriately – but, we have already started to let their levels influence our overall judgement about the workability of EMU in its current state: asset prices have adjusted because short-term risks of an EMU break-up have declined, but further adjustments in asset prices won’t spur a greater degree of EMU survival. Time and time again, asset price fluctuations in a persistent “state” or direction tend to obfuscate all sorts of matters related to investor attitudes and perceptions, relative to underlying fundamentals.

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