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Tuesday, 24 October 2017

A Tale of Two QEs

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Anthony Peters: On Yellen, St Mario and “whatever it takes…”.

Anthony Peters

Anthony Peters, SwissInvest strategist

Is the US doing better despite or because of the Federal Reserve’s generous and long-running QE programme and is the eurozone doing worse despite or because of its absence in the ECB’s central policy?Or put the other way round, does the US fall out of bed if QE is tapered and does Europe suddenly catch fire if the ECB does in fact begin to open up its balance sheet to willy-nilly asset purchases?

Please don’t expect me to have the answer; much better brains than mine are ruminating on the matter and have not really got it either – although that should not prevent us from giving it a coat of looking at. The question, especially with regard to the latter, is pretty relevant for if the outcome of the reflection fall butter side down we could be facing another leg of the as yet unresolved eurozone crisis.

“…in the greater scheme they have been bailing out the sinking ship with a tea-cup.”

US stock markets had another amazing day on Thursday with both the Dow and the S&P making new record highs. The indices were driven up by some very dovish comments by Fed Chair apparent, Janet Yellen, in a very confident and soothing performance in her Congressional confirmation hearings. She succeeded in saying all the right things which were that although recovery is visibly strong, the economy isn’t out of the woods yet and is, in her words, performing far short of potential. The 7.3% unemployment number is clearly central in her thinking. Markets took that to mean that easy money isn’t on its way to the slaughter pen yet. Yippee! Buy, buy, buy!

Get Out of Jail Free

On the other hand, Europe was faced yesterday with some pretty sobering numbers as GDP was reported throughout the eurozone. As expected, Germany looked healthy with a Q3 QoQ increase of 0.3% and a YoY performance of 1.1%, NSA. However, France and Italy, the second and third largest economies in the currency area both undershot with the latter sporting an annual run-rate of -1.9%.

When we entered the early stages of the sovereign debt crisis, the less generous amongst us (including most of Germany) feared that excessive central support would hinder the implementation of some of the radical reforms which would be needed in order to encourage or even force the weaker members (the term PIIGS has become too politically incorrect as have Club Med and Garlic Belt) to tackle the causes and not just the symptoms of their fiscal plight.

St. Mario’s “whatever it takes” gave them just what the northern members feared, namely a near permanent Get Out Of Jail Free card. Significant steps have been made in Ireland, Portugal and Spain and the strong efforts of the Greek government should not be disregarded either, but in the greater scheme they have been bailing out the sinking ship with a tea-cup.

Investors are by nature positive thinkers for whom the glass is commonly half full rather than half empty and the area has been granted a significant dose of the benefit of the doubt. The talk of bringing QE to bear in the Eurozone might be taken as another part of “whatever it takes” but it might also be interpreted as proof that the efforts of the last three years have largely been in vain and that time and money have been wasted to little or to no lasting effect.

Further stress testing of the European banking system lies ahead but earlier versions of the same exercise have looked more like attempts by the authorities to prove how robust the system is rather than to lay bare the weaknesses. It would be churlish to assume that the next round to come up with the same results but those who regard this as quite possible will surely find enough evidence to make their case. If not, expect some very chunky cash calls from the sector. The longer it takes for the Eurozone to show serious signs of growth, the more the perceived asset quality of the banks’ lending books will need to be questioned again.

Nevertheless, I can’t see anyone wanting to rock the boat before the end of the year - we are half-way through November and it has been a good one for investors of all hues other than those who bet too heavily on gold and other commodities - and I still reckon we best cruise through to the end of the accounting period long risk.

Meanwhile, I was happy to see Thomson Reuters, owners of the IFR, coming to market in the US in a lovely three-tranche deal at 3½, 10 and 30 years. I had clients who wanted to buy into the issue and who hoped that, as Thomson Reuters publishes a quantity of my musings, I might be able to secure some bonds for them. No luck. We can use their screens and read their magazines, we can even write for them but we can’t buy their bonds at issue. Welcome to the real world and have a nice day.

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Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. This week has seen the last hurrah of the Little Master, Sachin Tendulkar, scorer of 100 100s in international cricket in his 200th and final Test Match for India. For lovers of other games, try to imagine Lionel Messi playing and dominating for Barca and Argentina in his 24th consecutive season, Federer still winning Wimbledon at the age of 40 or Usain Bold winning the 100 metres in Tokyo in 2020. That might put Sachin and his achievements into context.

My mind, on the other hand, is firmly focused on seeing England face New Zealand at Twickenham tomorrow. I’m afraid I can’t see much of a happy outcome there….     

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