I wonder how many parts of Wall Street will be feeling in light of the executive order calling for travel restrictions into the US.
The business friendliness that financial markets are expecting from the new Trump administration is one thing but the flagrantly xenophobic one-size-fits all approach to the citizens of seven sovereign nations smacks of petty, 1930s style fascism. Although it might have become a general “no-no” to compare anything to Europe in the 1930s, this time it’s not. I was particularly moved to see at one of the many demonstrations, among all the to-be-expected declarations like “Mexicans for Muslims” and “We’re all Muslims” and so on, one particularly poignant placard in English and in Hebrew, “We will remember”.
So off we trot into the new week, book-ended by China still celebrating the Lunar New Year at the beginning and the US payrolls report at the other with January month-end to deal with in between. Can it really be that 1/12th of the year has already gone by without any sense yet of where 2017 is actually going? Equity markets, never the home of the sharpest intellects in financial markets, are sailing along quite happily unless you’re Australian, maybe, where the ASX index ended the month as close to unchanged as it could get – it lost 4.2 points or 0.08% on the month – or France, which is also struggling to work out what it wants to be when it grows up.
Hamon cheese
The selection of Benoit Hamon as presidential candidate for the French Socialist party is a case in point. Sweeping out those associated with François Hollande is one thing but elevating a proponent of a universal income of €750 for each citizen and a supporter of the 32-hour week – the 35-hour week didn’t work so let’s try 32 hours instead – is an act of complete lunacy, although lunacy seems to be the order of the day. That said, the Socialists might just as well put up a Bresse capon as its candidate stands absolutely no chance whatsoever of progressing beyond the first round. Although François Fillon, the Republican candidate, had looked like a shoo-in, the developing scandal surrounding questionable payments to his wife as a research assistant might yet trip him up and let Emmanuel Macron overtake him at the last corner. Whichever it is, one has to assume that he will ultimately wipe the floor with Marine Le Pen, irrespective of how firmly she wins the first round.
It is interesting to see Hamon, the French equivalent of the Jeremysaurus, raise the subject of a universal income. One of the few examples of this is in fact to be found in the UK where every pensioner, irrespective of their financial standing, receives £200 per year as a “winter fuel allowance”. The resistance, especially from the left, of a universal flat payment is significant and highly divisive. The Swiss have already rejected a proposal to this effect at a federal referendum and although the idea of a universal payment looks attractive and much less complicated and hence less expensive to manage than the current systems of piecemeal benefits, those who support it most will also be the first to hate it when they find captains of industry and rich bankers being paid too. As political thinkers identified many years ago, liberté, égalité and fraternité encompass within themselves unbridgeable incompatibilities.
Abundance
Two weeks ago today we were trading Bunds at a yield of 0.27%. On Thursday we got as high 0.494% so, for all intents and purposes 0.5%. Although the yield has pulled back to 0.46% as of this morning, it is clear that the magic has gone out of German Bunds and, in my humble opinion, not a minute too soon. The new and current 10-year Bund, the 0.25% February 15 2027, was brought to market on January 13 at an auction price of 98.91. As at this morning, the bond is trading at 97.91 which is a spot-on loss of one point. The issue yield was 0.36% so a one point loss in price represents more or less the equivalent of three years’ pre-tax income.
Investing other people’s money at as close to loss-making returns as can be is only justified by pointing to the primacy of return of capital over return on capital. Thus, anybody returning from a few years in space and away from the mess that calls itself the single European currency would have to conclude that terrestrial investors still don’t believe that some of the other sovereign issuers within the eurozone will not at some time in the not too distant future default on their debt. Maybe they’re just taking a defensive position in anticipation of adopting a member with an internal budget deficit of 30%. I’m not referring to the Ukraine but to that wonderful little country called Scotland, the first minister of which is agitating for a renewed referendum on independence.
If in doubt
The world is moving very quickly at the moment and not too many people actually know in which direction – I certainly don’t – which may in part explain the extraordinarily low volumes in secondary markets. If in doubt, best do nowt. New issuance in credit markets is still being taken down with enthusiasm and the tone might improve following the initial swamping of the pre-inauguration market. Now, as the corporate reporting season is in full swing, many companies are in blackout so supply is patchy. Talk of feast and famine.
It is always good to hold a contrarian view. There is no doubt that the dollar and US stocks are the most crowded of trades and the ones that one would instinctively want to short. But if one wants to sell something, one has to have something to buy as an alternative and that is where the contrarian argument begins to stumble. Thus, lacking truly compelling alternatives, it would appear that sitting tight is not the most ridiculous of stances. My suggested trade of the day is not to trade today…
Have a good week.