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Friday, 25 April 2014

Choppy waters churn up dormant demons as summer draws to a close

First Monday in September – back to school. Well, that is unless you happen to be American, in which case you have the day off. But, that minor detail aside, the rest of the year begins here and one hell of a last four months they could prove to be. The list of potential land mines which the global economy and national and international politics might stumble on to is staggering.

Anthony Peters, SwissInvest Strategist

Nevertheless, every night people will continue to go to bed in the firm belief that tomorrow will be better than today was and in the knowledge that if they commit themselves and work hard the world will not come to an end.

ECB President Mario Draghi has much to be thanked for in terms of giving us what has actually proved to be a very calm month of August. However, the issues which we have not focused on for the past few weeks are still there and so this might be a suitable time to briefly identify and isolate the key targets in the autumn shooting gallery:

We have Spain, manifestly with its back to the wall, in the clear expectation that the ECB will this Thursday announce a bond buying programme that will alleviate the pain. Prime Minister Mariano Rajoy is currently prancing about giving interviews to all and sundry and, although not stating explicitly that he does not want to formally request a bailout, he has made it clear that he expects the eurozone partners to sanction the ECB to do “whatever it takes” to salvage his country and in doing so maintaining the currency union.

Whether this is a charm offensive or a Papandreou style threat to blow the project out of the water unless he receives help is a moot point.

Next up, we have Greece itself. A Harris Poll conducted on behalf of the FT which reports on what the people on the Street in other countries think of the situation shows that only 26% of Germans polled believe Greece will ever be able to repay its loans and 54% expressed the opinion it should exit the euro.

In the poll which was conducted across Germany, France, Spain and Italy, it appeared that the weaker the country itself, the softer the sentiment was towards Greece. Whereas 74% of Germans don’t think the Greeks will repay its bailout loans, 77% of Italians do as do 57% of Spaniards. Well they would, wouldn’t they?

Germany’s growing unease

All the while, pressure is mounting in Germany with the Federal Constitutional Court’s decision due to be handed down on September 12 on the constitutional legality of the ESM and the fiscal compact. It is hard to believe that the court will rule against the government, but the ongoing challenges confirm there is growing unease within the country that, although it is expected to provide the bulk of the funds to keep the single currency system afloat, it is not allowed to exercise control.

China decline

Next up we have further evidence that the Chinese economy is flagging. The HSBC Manufacturing PMI for August fell further to 47.6; underlining that growing US demand is not sufficient to offset the decline in European markets. The great hope which was being expressed a few years ago that China would take the lead as the driver of the global economy has proved to be frustrated as it still derives much of its economic strength from feeding the consumption addiction of the West and not by turning itself into a consumer paradise in its own right.

US election rhetoric

Another key theme will of course be the US presidential election. So far, both sides seem to have done all they can to lose. The election rhetoric is one of a fight for the heart and soul of America, for a setting of the points for the next 50 years. Great ideological battles may be all well and good, but at this moment in time, the US is no longer the overwhelming economic power it once was and, hence, it too has become to some extent only a passenger on the train of global events.

The debate should be of huge interest to Europeans as universal healthcare will stand in the middle. “Obamacare” was hailed in Europe as the Americans finally getting the message that a society owes a duty of care to all of its citizens, irrespective of their financial means. However, the detractors argue, and not entirely without reason, that committing to public services on open-ended funding promises puts you exactly where the eurozone laggards are now to be found and that big government has had its chance and has blown it.

Added to this, we have the central bank overlay. It’s no longer a “Will they or won’t they”? discussion, but one of “When and how much”?

So there we are. Two-thirds of the year have passed and the tinkering continues without many of the fundamental issues having been addressed. One of the axioms of the modern Western mixed economy which generates 40-odd% of GDP from public sector deficit finance spending is that if the government attempts to cut its fiscal undershoot, the economy will go into recession.

What part of that is difficult to understand escapes me. And yet equity markets get excited every time there is talk of stimulus which resolves nothing and only postpones the inevitable.

Happy autumn, folks.

On the other hand, as I note above, people will come in to work and get on with the daily tasks. The new issue pipeline for the coming four to six weeks looks impressive and we will all be nose to the grindstone. Some risk of oversupply features here and there – there will be deals which get swamped for no reason other than that they came to market a day too early or a day too late.

Failed EFSF 10-year a warning sign

The failed EFSF 10-year of last week might be a warning sign that not all is as it could be but, to be frank, I don’t feel that there will be too much indigestion. The risks remain far more firmly based in the peripheral camp where the significant selling by Spanish banks of Spanish sovereign paper needs to be watched carefully and I would be a seller of Irish following the revelations about the bulky positions held by Franklin Templeton. Single buyer short squeezes are dangerous as Bankers Trust found out 20 years ago when it discovered that its star trader, Andy Krieger, more or less owned New Zealand.

Anyhow, there is plenty to be thinking about for the while and I wish everyone the best of luck in navigating the choppy and dangerous waters until the end of the year.                                                   

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