An oncoming train?

7 min read

It’s that time of the year again and the great and the good – how great and how good is a matter for debate – are descending on Washington for the annual meeting of the International Monetary Fund where they will be told what we already have been told, namely that the global recovery is stalling. There, under the leadership of its French Managing Director, Christine Lagarde and its French Chief Economist, Olivier Blanchard, the IMF will surely call for more spending in order to achieve what lots of spending has already failed to achieve.

The downward revision of the IMF global growth forecasts can’t come entirely as a surprise. Many might argue that markets have been telling us this for several months. I did warn yesterday of the divergence between the level of US cash equities and the volatility reflected in the VIX index and subsequently talked to a few people in the market; we did wonder whether one ought to put a spread trade on between the two.

Overnight, the S&P took a right and proper dive, dropping by 2.07% while the VIX shot up 3.65 points to close at 18.76 points, its highest level since late January and massively higher than the 17.03 points it peaked at during the wobbles of early July. Risk asset markets are not a happy place and even the Dow is now within just half a percentage point of falling into negative territory, year-to-date.

On this side of the pond, already battered by Germany’s less-than-convincing August Factory orders of Monday, and September Industrial Production figures of Tuesday, took another one on the nose yesterday as the Trade Balance was reported with month-over-month exports falling 5.8% to imports’ drop of 1.3%. In money terms, exports undershot expectations by €3.6bn which is a fair old stack of jack if you are the engine room of the world’s largest economic block. It’s too early to call it a game-changer but if we do get a serious and sharp re-pricing of risk assets – we used to call that a “sell-off” – there is no doubt in my mind that this past week will be seen as the launch-pad.

Forget Fed speakers and ECB sound bites. This is where you have to ditch the printed timetable and put your ear to the rails to know whether there is a train coming towards you.

VIX and Bunds

Returning briefly to the VIX index – in the greater scheme of things 18.76 means little; not until it breaks above 20 or even 22 is there anything serious to worry about. We have had plenty of spikes into that territory in the past three years and none of them augured anything particularly nasty or lasting. All the same, I do not feel tempted to call for the dips to be bought; the downside risk seems somehow to be greater here than that to the up-side.

Guvvie bond markets are telling their own story; the 10yr Bund dropped through 0.86% in intra-day trading yesterday, although woe betide those who are trapped long at that level; we open this morning at 0.913% – remember that 5bp in yield is half a point in price, which in turn represents 6 months of interest income. Ouch!

The UKIP factor

Here in the UK, interest is not focused on such mundane matters as financial markets as last night in a by-election the United Kingdom Independence Party, UKIP, took it’s first parliamentary seat. That particular one was a shoe-in as it was the sitting MP who had changed sides from the Conservatives and who has now been re-elected for UKIP. More interesting, and in some respects more scary, was the by-election in Middleton – close to my place of birth – in which the Labour vote is normally not counted but weighed and where UKIP came within just a few hundred votes of snatching that one away from the ultimately victorious Labour candidate.

Since the formation of the first post-French Revolution national assembly, politics has been defined as right and left – that was based on the agreed seating arrangement and, had they sat the other way around, then conservatives would now be the left and socialists the right – and observers find it hard to deal with movements which are neither one nor the other. In fact UKIP occupies that same middle ground much which is fought over by reactionary xenophobes across Europe and the US, namely that of the white lower-middle class. Forgetting demagoguery and political correctness, this is the same ground which France’s Front Nationale is targeting and it is the same which was so effectively captured 80 years ago by the NSdAP. Being a member of that demographic group does not make you a Nazi, nor does targeting it as an electorate.

What it does do, and this is fun to watch, is oblige the main parties to learn how to fight a war on two fronts. The old “We say, they say” of bi-partisan politics doesn’t work. The main parties demonstrated their inability to deal with this during the Scottish referendum which nearly cost us the Union and now they are again faced with the modern equivalent of the defence of Singapore. The British had turned the city into an unconquerable fortress with huge batteries of heavy guns defending the port. So in 1942 the Japanese came through the jungle and walked in the undefended back-door. Simple.

It is too early to declare, as UKIP is already doing, that the fabric of British politics has been changed forever. But I do hope that the main parties do not take the EU-style approach after the elections for the European Parliament, where it was blithely announced by the Muppet in Chief and his cohorts that the majority of the electorate had not voted for the various eurosceptic movements and that therefore there was no need to review the status quo.

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Markets are feeling a bit feeble on the open, but I can’t see this as being the day when the world goes to hell. Best play close to home and, if in need of assets, avoid cyclicals.

Anthony Peters