Beware of the hypes of March

7 min read

There is no question that the past few weeks have been a bit tricky and the wires are abuzz today with the news that the Dow, after eight days of losses, has had its worst time since 2011.

It has given back around 565 points from its March 1 high close of 21,115.55 but it is still up 4% year-to-date, which for all intents and purposes is an annualised 16%. And as far as the eight days of losses are concerned, three of them were for less than 10 points, which could therefore be discounted as rounding errors.

Sure, things aren’t all well in the garden but when have they ever been? After Donald Trump’s defeat on Friday at the hands of what is supposed to be his own party, one could either conclude that the Republicans are split – which they are – or suspect that Trump has been found out to be neither Republican nor Democrat but an individual who successfully hijacked a split and dysfunctional Republican party with its well-oiled election machinery and rode it all the way to the White House.

That said, however, there are still large swathes of the centre right that include the management of much of America’s corporate power, who believe that the Washington “procrasterati” urgently needs a jolly good kicking and who credit Trump with a better chance of doing so than anybody else. A better chance that is, not a slam-dunk certainty.

Is the age of post-truth politics or of post-politics politics? Who cares for at the moment. Repeal of Obama’s environmental protection policies or not, this is simply quarter-end and in Japan it is financial year-end. Other than calendar year-end, this is the most technical period of the year and trying to read something into movements in either direction that isn’t there might sound smart but it does little more than to impress the less experienced. Index adjustment is trumps and while the majority of the market is still happy to be long risk, there are those who have been trying to trigger a broader sell-off. Shorts generate no income and asset allocations out of equities and into bonds still make little sense.

BORING IS GOOD

High-yield credit has so far this year done little to impress other than not fall out of bed. The iTraxx Crossover index closed 2016 at 287.83 points and at last night’s close, even after a 3.5 point widening on the day, was still only at 294.03, barely 7 points away from the last quarter-end mark. To suggest any inspiration in that sector from the risk asset market would be fatuous. On the other hand, boring is good when it comes to generating stable returns in an uncertain world.

Quarter-end index buying should not be mistaken for renewed optimism. US markets are on hold now as they ponder the Donald’s possible next move. It is too early to seriously sell into his frustrations and failures and although the financial sector has given back some of the post-election froth only a brave man would put on a strategic short reflecting a bet that none of Trump’s election promises will be made good. The Obamacare defeat might have put a damper on some of the fiscal projections and plans for the great infrastructure spend but sometime in Q2 we should get a clearer, revised picture of what is planned.

Meanwhile Brexit Day draws closer although that should really be Article 50 Day, which isn’t anything like as catchy. The BBC put on a Question Time special to deal with the subject and make it all a bit clearer to Bob and Heather SixPack but once again it declined into a party-political slanging match and all that became clear is that whatever hope there might once have been of cross-party cooperation will be sacrificed to small-minded sniping.

Bill Blain’s First Law springs to mind; markets will do whatever they can to inflict the maximum amount of pain. Methinks there ought to be a First Law of Brexit along the lines of opposition parties not caring as much about the outcome as about how many points they can score off the government between now and whenever.

STRAWBERRY FIELDS FOREVER

The visible flops of the populist parties in the Netherlands, in the Saar state elections of the past weekend, and the certain failure of Marine Le Pen to take the Elysee Palace in May will probably embolden the powers that be, which in turn will support recent comments by James Dyson, the fiercely pro-Brexit inventor and industrialist who believes that the EU is merrily digging itself a hole of self-satisfied uncompetitiveness. Dyson is very much a hard Brexiteer but he can be; he doesn’t have acres of strawberry fields to pick. That said, I live in a rural area and for every Remainer I find a Brexiteer among the farming community.

Although Brexit talks formally begin on Monday, the impression we receive is of two sides neither knowing where they are going nor how they intend to get there when and if they do.

On a more practical note, it was interesting to hear ECB chief economist Peter Praet’s comments on the ECB’s proposed Safe Asset plan. The old idea of bundling individual sovereign risk into a collective risk – I mooted this a few years back in the context of Eurofima - isn’t new but Praet evidently isn’t impressed. If these are created synthetically through an SPV, investors will be faced with a liquidity risk they don’t need. It should be borne in mind that it was a lack of liquidity and not underlying credit quality that triggered the global financial crisis. The collapse of LTCM was also not a matter of credit quality but of leveraged correlation and owners of some of the synthetic constructs of the past will attest to them being great in theory but a millstone in practice.