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Tuesday, 12 December 2017

A day of farewells and the beginnings of a rebound

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

Today is the day for three good-byes; I shall take them in order. First up is of course Steve Jobs. I was on my iPad this morning but my connection with Apple goes back to the late ’70s where I first encountered the brand in the form of the Apple II, the first really usable and integrated PC, long before IBM had even created the term PC.

The Mac system was still a long way away, let alone the iPod, the iPhone and of course the iPad. Thirty-three years ago we already knew him by name and yet he was only fifty-six when he died. Work that one out.

Second is Jean-Claude Trichet who chairs his last ECB meeting today although he is not quite gone. Again, Trichet has been with me for many, many years. He was with us when the “Franc Fort” policy was challenged under his leadership as Governor of the Banque de France and he gained my admiration when he stared down the markets as they were trying to attack the franc in the way they had slaughtered sterling a few years previously.

He took on the markets and won and as such became one of the few Frenchmen other than Napoleon, Pierre Berbizier and Eric Cantona whom I truly admired. When he was blocked from becoming the first President of the ECB in favour of the late Wim Duisenberg, it was because the French had tried to occupy every position of authority in the EU and Jacques Delors was already in place. On merit, the job should have been Trichet’s. He sailed into and through the eurozone crisis wearing his sphinx mask and in Mario Draghi he has a highly qualified and respected successor. Nevertheless, I hope it is a case of “Adieu” and not “Au revoir”; Trichet has had more than enough fifteen minute periods of fame.

Third, goodbye and good riddance to Sarah Palin; I have nothing more to say about her and am happy that it shall stay that way. American politics will surely be a better place without her.

All the while, stock markets showed the first sign of a rebound that looked and felt to me as if they might be serious. Sure, the volatility in prices had the same amplitudes as we have seen day in, day out for the past weeks but the rhetoric coming from the political classes is beginning to show signs of an understanding of the severity of the risks.

Let’s face it, how can we expect there to be a solution to the raft of problems unless those in power know what they are. The cavorting around at summit after summit while whistling in the dark might be drawing to a close; this is not to say that the eurozone sovereign debt crisis and the potential concomitant banking crisis and second credit crunch are off the table, but at least I do get the sense that the authorities are finally and for the first time cruising into these choppy waters, periscope up.

Recap debate: Where from, Italy and Spain?

The debate as to how much the European banking system will need to be recapitalised by is open; numbers anywhere from €200bn to €700bn are being bandied about and, although there is no doubt that Germany and France can find the funds, where Spain or Italy would take the money from in order to deal with their moribund banking systems has yet to be determined.

However, the acknowledgement that verbal threats and promises alone will not bring the crisis (or crises) to an end and that the grasping of nettles will not wait until after the next respective elections is a huge leap forward. This is where the confidence in the markets appears to stem from. Yesterday’s rebound in the price of risk assets appeared, although fragile, to be real and more than just a technical bounce. Of course, I might be wrong – we’ve had more false dawns than an Arctic winter.

The acknowledgement that verbal threats and promises alone will not bring the crisis to an end and that the grasping of nettles will not wait until after the next respective elections is a huge leap forward

Finally, as Trichet chairs his last meeting, Mervyn King is far from finished as he sits with his own MPC. Although the UK economy is still very weak, it is currently not contracting as such and the banking system is not in the mess in which its European peer group finds itself. The authorities here stepped in aggressively in 2008 and forced early recaps. The MPC can focus on the one subject which will be taxing it and the markets – is today the day to announce further QE?

The market seems to be more or less evenly split as to whether it is announced today or at the November meeting. I believe it will be in November as the Committee might want to wait to see what the ECB does, what the eurozone politicians plan and how the Chinese economy is developing. Car players know that the only trumps with power are the ones you haven’t played. As the monetary authorities are running out of ammunition, they should be parsimonious with what they are left with. David Cameron set out his stall at the party conference in Manchester in that he made it quite clear that the only way to deal with a debt crisis is to repay the debts – austerity remains a key part of government policy. An early pulling of the QE trigger could blunt its effect, should it actually have a measurable one, which is yet to be proven. Stroll on Billy.       

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