Don’t you just love it when the journos make up reasons for things to have happened, or not, as the case may be? “Asian Stocks Fall, Yen Gains as BOJ Maintains Policy”. I think not.
There was next to nobody in the world who expected Kuroda-san to tinker with existing monetary policy at today’s BoJ MPC meeting, even though there was confirmation that the easing gun remains loaded, albeit with the safety catch still on. Japanese asset markets did trade lower and the yen did strengthen but most of that must be put down to a continuation of the consolidation we saw in Europe after the high jinks of Friday.
From ECB to FOMC to BOE
That aside, the FOMC meets tomorrow and although the probability of an immediate further tightening move in the US is next to zero – the futures implied probability is only 4% - markets are uneasy with respect to what lies ahead. The elation over the ECB’s dramatic winner-takes-all, no-holds-barred, across-the-board easing package cannot be transposed onto either the BoJ or the ECB, although the call for the Bank of England’s MPC, which meets on Thursday, might be less certain.
With Mark “the magician” Carney’s continuous flip-flopping, anything seems possible. The assumption has to be, though, that the Old Lady will keep very quiet as George Osborne, the Chancellor of the Exchequer, delivers his Budget to the Commons tomorrow. It would be fatuous to expect the MPC to do anything at all while the markets are still digesting revised fiscal policy. The Fed, on the other hand, has plenty of good news to play with.
Underlying growth, the labour market and core inflation are all strong enough for Madame Yellen to speak softly while carrying a big stick. Although the probability of a move tomorrow is, as noted, only 4%, that same probability rises to 27% for the April meeting and by a further 24 percentage points in June. The last thing I’d ever want to do is to infer that futures implied probabilities are to be taken seriously but they do show that sentiment towards the Fed being on eternal hold is finally waning. Does anyone remember that during the big equity market swoon in February there were people - and supposedly intelligent ones at that - talking of the Fed easing again?
Market stalls
On a more practical note, our markets had a tricky day on Monday. The grabathon of Friday carried on in the early part of the session but petered out mid-morning, and by the afternoon there were new issues trading to a discount. Not least of these was Femsa’s 1.75% 2023, which at €1bn simply looked too big and too ambitious for the debut issue for a Mexican borrower.
There were lots of technical issues to deal with too. Although it was the right move to bet long on the European corporate market after the ECB’s inclusion of corporate bonds in the asset buying programme, the wording of the announcement gave only scant details as to what exactly will be on the chopping board. Specifically, it stated that it will include investment grade-rated, euro-denominated bonds issued by non-bank corporations established in the eurozone, but that covers a multitude of sins. Thus, the best way to get long had to be through generic products, such as the iTraxx Main index, or through ETFs.
If money goes into a mutual fund, the portfolio manager gets to choose what to invest the inflows in and when. The ETF manager has no such freedom and has to buy, irrespective of levels. This helped push the prices of some cash bonds way through implied default value and we heard stories of dealers having showed paper up to a half point above their own offer price and still getting lifted. By Monday afternoon most of the madness had subsided and, although nobody seems to be quite ready to go short again yet, the first traces of returning sanity were detected.
Germany’s poll position
Markets showed a rare lack of interest in the outcome of the regional elections in the three German states and in the bloody nose which Mutti Merkel and the CDU carried away. This indicates to me that investors have lost faith in politicians’ ability to influence the direction of the economy and a belief that whatever happens will happen, with or without the influence of central government. In Europe we have long had the strange “division of power”, under which the only central structure with overarching, pan-eurozone authority has been the ECB. The strong showing of the AfD not only reflects the more base xenophobia – whether nature or nurture has psychologists at each other’s throats - but also a protest against the perceived emasculation of the Bundestag by Brussels. Is this the beginning of Deuxit? Surely not yet!
Finally, the VW story rumbles on. The latest is a class action law suit by 278 institutional investors over the diesel emissions cover-up. Next they’ll be suing the Church. It is, after all, the good Lord’s representative on earth and he is responsible for all of us dying. That has to be worth a try!