Anthony Peters, SwissInvest Strategist
Today’s strike action in Portugal reminds us that the European debt crisis is far from over and the Flash PMI figure from China – the reading was at 48.1 – also reminds us that the economy there is slowing.
So the main driver of the world economy is no longer driving quite so hard and some of this is down to the continuing problems in the eurozone.
The leadership in Beijing has made it clear that it is aiming to facilitate a soft landing but that it is not in the mood to inject stimulus just for the sake of it. We have been watching their real estate bubble for several years with both fear and awe, but as it begins to deflate we are pinning huge hopes on the Chinese government being able to manage it down in a controlled fashion.
To do so, it must (and will) resist the temptation to ease monetary conditions and to simply effect the construction and completion of ever more empty buildings. However, soft landings are a fairly rare event although Beijing’s response to the post-2007 crisis in the West was exemplary and I guess most markets are expecting them to be able to pull the trick off again.
Markets are bored with hating themselves and they won’t let a few details like a slowing China or a struggling eurozone periphery spoil the fun
The Portugal situation is also supported by the markets’ belief that with the European authorities having pulled the rabbit out of the hat in the case of preventing Greece from dragging the eurozone into the abyss, that they will be able to do the same again for Portugal and, if needed, Ireland and Spain as well.
These are all round big asks but markets are bored with hating themselves and they won’t let a few details like a slowing China or a struggling eurozone periphery spoil the fun. There is little doubt that the early signs of economic recovery in the West have taken root although one should be cautious in expecting a straightforward and linear recovery. The path ahead remains crooked and stony.
The next big hurdle will be the challenge to the monetary authorities to withdraw existing liquidity facilities. The ECB is first out of the blocks as it looks at winding down its purchasing facility for covered bonds. That particular programme never really got off the ground but with the LTRO in place, it was never really needed.
Lessons from Japan
Nevertheless, as fancy as the recovery might look in terms of quarterly GDP figures and falling unemployment, much of it is still feeding on the benefits of quantitative easing and near-zero interest rates. Central bankers are very gently and very carefully beginning to let loose the first warnings of incipient inflation risks although I must say that personally I am still pretty sanguine on that front. The lesson from Japan in the 90s is that it is hugely dangerous to tighten monetary policy too early and some economists argue quite convincingly that the lost decade was as much due to the BoJ jumping the gun as it was to the busted banking system and the struggling real estate sector. My thinking is that barking policy setters don’t bite.
Alas, I regard the pull-back which we have seen in risk assets in the past few days as nothing of significance and reckon that one should be buying the dips here. I would also feel tempted to re-weight away from emerging markets and back into core developed markets. Is that derisking or adding risk in the new global environment? I wonder…
Budget talk
Meanwhile, the Rt Hon George Osborne delivered his budget speech in London and some upset it has caused. The BBC headlined last night’s news with “Chancellor slashes tax for the super-rich!” as he cut the top marginal rate for earnings over £150k from 50% to 45% followed by the “The Great Granny Tax Robbery” which lifts some of the tax benefits for pensioners.
The fact is that in the “We are all in this together” stakes, the pensioners have been the only sector of society to have been protected at all turns. On one hand the generic grumble of the past few years has been that the baby-boomers milked the system and left it bankrupted to the next generation.
Now that Osborne tries to take something back from those who supposedly had the best of the good years, he gets hung out to dry. He might have done the right thing but he has two PR disasters on his hands. What didn’t make the headlines was the cut in corporation tax and the overall shift in government policy which acknowledges that business is not only here for milking, something that the invisible member for Kirkcaldy & Cowdenbeath seemed to have institutionalised while trying to elope with Prudence. I suspect that history will be kinder to Osborne than the press and the opposition are being today.