Sunday, 24 June 2018

ECB stands above the 'silly season' melee

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Among journalists, the dog days of August are known as the “silly season”. Not because the news is silly but because, due to the lack of really big political news stories, small events which normally barely make it to the inner pages suddenly end up on the front page and the junior hacks who have been left behind to switch the newsroom lights on and off while the big beasts are away, much to their joy, find their byline up in banner-sized print.

Anthony Peters, SwissInvest Strategist

August also has a silly season element in markets when, as in journalism, what once looked like a diversion turns into a big story and what once looked like it was the biggest thing since Columbus thought he’d found the western route to India is a trading cul-de-sac.

Well, Monday saw Spanish yields at their lowest level in nearly three months with the benchmark 10-year Bono trading through 6.25% yield. The story reported in Der Spiegel that the ECB was going to set a threshold yield spread between peripheral government bonds and German Bunds which it would defend – a bit like the Swiss National Bank has a mark for Euro/Swissy at SFr 1.20 which it will defend “a outrance” – had the markets abuzz and the ECB’s denial of the existence of such a policy had next to no effect.

Key drivers

Once the key drivers of the markets were fear and greed. Now it all seems to be about the swing between the sentiments of “There’s no way they can….” to “There’s no way they can’t…”. Mario Draghi’s “whatever it takes”, as abstract as that promise is, has been very powerful, maybe  more than even he himself expected, and markets are happily trading risk-on on the back of it. The grand declarations of unity which we heard a couple of years ago that if one member left the euro (no need to add who they might have had in mind), then the whole project was dead has become something of an albatross around the neck of the eurozone. Once tested by the markets, it also proved to be a hollow promise and one which is proving to cost more than it may be worth.

Asking what “Whatever it takes” actually means is, to use a very English comparison, like asking “How long is a piece of string?”. At this moment in time, the assurance alone is doing the job but, as with many of the other verbal promises and assurances which we have had presented to us over the past two and a half years, once they were questioned by the markets, they proved to be weak and as such have in the end swung against their intended objective.

However, the huge plus in all of this is that, irrespective, the ECB still seems to be the one institution in Europe in which everybody retains faith. Despite all the efforts to undermine its independence and all the attempts by the polis to treat it as their personal piggy bank, there remains blind belief that if anyone can, it can…..and will. The risk is that the political classes take the standing of the ECB and use that as an excuse to take their foot off the gas – should they have ever had it on it in the first place.

Derisory volumes

Meanwhile, equities continue to rally – or at least it looks like they are. However, my little spies tell me that in actual fact the action is still all in the index futures and that volumes in individual stocks remain derisory. Investors will want to see confirmation of the assumptions which underlie the rally before committing proper money to rally.

As I noted a couple of weeks ago, nobody can afford to miss the rising prices but we have seen too many false dawns for there to be real confidence out there yet. There is no doubt that recovery momentum is building in the US but we had not expected anything else ahead of the elections and we have been talking about a fiscal reality check after the inauguration in January 2013 for at least the last 12 months.

Apple Inc is a different story altogether as its stock closed at US$665.15 last night which gives it a market cap of US$623bn, the highest of any US company ever. To think that as recently as last October you could have bought Apple at US$354.24. I don’t purport to understand much about equities and the little I do know doesn’t stretch to the tech sector but I do wonder how many of those highly paid and highly rated analysts stood out last year with a buy recommendation with a 12-month target of US$665? Must have been the same ones who in May had a three-month target for Facebook at US$20.00. I rest my case.

I exchanged notes with an equity sales chum of mine yesterday who wrote of the index rally and in reply to my question as to whether he was seeing any flow: “… it is like sitting at traffic lights; if you don’t turn left or turn right you will get hit in the a** by an articulated lorry…so; its decision time!!!!”. I couldn’t have put it better myself – or worse.

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