Monday, 24 September 2018

Abe Mario

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Anthony Peters on Japan’s dubious QE, the ECB adpotion of it and the Greek wildcard.

Buy the rumour, sell the fact? Why not? And I’m not only talking of the ECB’s much vaunted QE programme which is supposed to leave the incubator today and which will be asked to breath on its own. The big, big news overnight comes from Japan – which Mutti Merkel happens to be currently visiting – where Q4 Final GDP revisions show figures revised sharply downwards.

Quarter over Quarter GDP growth in Q4 has been revised down to 0.4% from 0.5% which, if looked at that way, shows growth to be 20% lower than previously thought. This kicks on into annualised growth being lowered from 2.2% to 1.5%.

Private consumption growth for the period might have been pegged higher in the final calculation from 0.3% to 0.5% but that is met by a worrying downward revision in Business spending from +0.2% to -0.1%. Suddenly there is roaring silence as the Three Arrows of Abenomics look to have significantly missed their target. Has Japan’s last kitchen sink been wasted?

Chancellor Merkel was surely in the forefront of the sceptics when it came to the ECB charging headlong into Quantitative Easing and the Japanese experience can only reassure her – and other sceptics such as myself – that without the basic structural reforms to the economies in question, QE becomes an exercise in pouring valuable manure onto a concrete courtyard and then being surprised that nothing will grow.

The Nikkei might have traded down today – no great surprise on the back of those figures – but there could easily be more room for selling, considering that the index had closed on Friday at a mere smidgen under 19,000 points, a 15-year high.

Hang fire

If I were St. Mario, I’d feel sorely tempted to delay by first bond purchases for a few days until the Greek situation is clearer. The Hellenic finance minister, Yanis Varoufakis – he sounds so much as though he could have been a member of Aphrodite’s Child – is floundering. He is pouring out reform proposals which are being presented to the Eurogroup but which lack meaningful mechanisms for practical implementation. At the same time, he is urging Brussels to loosen the purse strings on the much needed emergency funding.

The Syriza administration might have been elected in order to revise Greece’s relationship with its funders but E.Z. Moneybags Esq, provider emeritus of cash to the needy, does not have the same mandate and is quietly sitting, drumming his fingers, as he awaits any sort of compelling argument why more money should be paid out. Other than a few vague promises of wanting to do better, Varoufakis has little to show. Scepticism reigns supreme when “Whatever it takes” meets “Not a snowball in hell’s chance”.

Presumably Varoufakis is still banking on the need for the QE programme to succeed being greater than the cost of slipping Athens a few billions on the sly. It is hard to see how he might not be right and how the powers that be might find the cost of blowing the euro project off course – not sinking, just blowing off course – too high to contemplate. If Varoufakis doesn’t blink, he might yet win or at least score an interim victory.

Market flips 

Meanwhile, the US indices closed sharply lower on the back of a very decent looking Payrolls report on Friday. The headline Nonfarm, at +295k, blew away the consensus forecast of +235k and the overall unemployment number fell from 5.7% to 5.5%. Consensus had been for 5.6%. Earnings, however, remain on the softer side of satisfactory and the Participation Rate fell from 62.9% to 62.8%. Fear of Fed action coming sooner rather than later spread rapidly taking the Dow down by 1.54% and the S&P by 1.42%. The front end of the yield curve took it on the nose with two-year notes jumping from 0.64% to 0.72% but the curve steepened, nevertheless, with 10-year yields closing 13bp higher at 2.24%, their highest for 2015 to date.

Football might be a game of two halves but markets are a game of 2,476 halves. There is a huge amount of push-me-pull-you going on, which is bad enough but there is now also a pernicious geo-political overlay. The arrest and charging a bunch of Chechnians for the assassination of Boris Nemtsov doesn’t convince, Greece still looks messy, the moral merger of Boko Haram and IS looks ugly and the UK’s uncertain relationship with the EU drifts further into focus every time Labour launches another half-baked, abortive attack in the UK’s coalition government.

I exchanged notes with a hedgie early this morning and his comment was simply “…it will all be irrelevant if the S&P rallies this afternoon”. I would not go so far as to suggest that never has a truer word been spoken in jest, but markets look to have decided that if there is something they don’t understand, the best solution is to behave as though it wasn’t there.

I do hope they do the same with respect to the Muppet-in-Chief’s suggestion that the EU needs to have its own army to counter Russian somethings or others. That’s loose and stupendously vacuous talk coming from a man who’s country sports an army of under 1,000 in strength, no air power and, being landlocked, no navy either. No reflection, of course, on the 1,000 professionals and volunteers who do serve their country, the Grand Duchy of Luxembourg, but seeing as that it is every government’s first duty – ahead of subsidising the arts and regulating banks – to defend the borders of the nation and 28 national governments need to be considered, I suggest that, as President of the Council, Mr Juncker should be occupying his time with more relevant thoughts. If they can’t coordinate a single currency and implement meaningful reforms to labour laws, what chance a credible army?

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