It is definitely March 9th today, not April 1st. I know because I checked the calendar. In which case, I have to offer my heartiest congratulations to the Financial Times for the best April Fools story that isn’t one.
It reports today on the reason for Monday’s 20% spike in iron ore prices, the largest single percentage rally in history. According to the “pink ’un” it’s all due to an impending flower show in the city of Tangshan.
Apparently Tangshan, a centre of steelmaking, is hosting a major horticultural exhibition this summer and the steel mills have been instructed to close down production from late April until October in order to clear the local air of the vicious pollution which the industry causes. Steelmakers, the ones which have not already been mothballed, are therefore cranking up current production to pre-empt the impending closed season. The race is on for iron ore and other commodities required, and Monday’s sharp jump, so the FT article suggests, is nothing more than a technical issue which will most probably have no lasting effect on the otherwise depressed prices of ore. Thus the article is titled “Flower power fuels iron ore surge”. No FT, no Comment….and no April 1st.
Misery
I understand that many investors are tracking euro/sterling in the vain hope that it might act as a “Brexit” barometer. The pound has steadily declined since November – long before the June referendum was a certainty – which excited some. From just below £0.70 in mid-November to just above £0.79 at the end of last month could have been seen as proof positive. Over the same period, of course, the euro rallied against the US dollar from €1.06 to €1.1350 which says nearly but not quite as much about euro strength as it does about sterling weakness. Now the markets have got that ECB stimulus bee in their bonnet again and are not asking about whether or not rates will be cut further at tomorrow’s ECB Governing Council meeting but simply which bits by how much.
There seems little doubt in the markets’ minds that St Mario doesn’t give a fig about how far into negative territory interest rates go – the Bund curve through 8 years is now prefixed with a minus sign – and we might well soon see the whole of Germany fall below zero. One broker friend of mine was asked a few days ago whether he had buyers of front end corporate debt with negative returns. I understand that he replied something along the lines that “Sorry, I don’t cover the ECB”. Low interest rates can achieve nothing if industry does not use the cheap money to invest in plant and equipment. But how should they if the very existence of such low rates has the central bank telling them that there is no economic growth in the offing, added to which net savers who might consume with investment income have no investment income to spend? Thus, from where I’m sitting, the message conveyed by a further easing of monetary conditions from the ECB is of persistent misery. Inflation will be driven by shoppers buying now in order to beat rising prices later, not by them holding back in anticipation of cheaper opportunities ahead.
In the past years, Japan has quite clearly manifested the weakness in the negative interest rate scenario. Why, oh why, is the ECB racing down the same road, equipped with blinkers but without brakes? All I see out there are investment bank economists who are excited about the probable magnitude of the ECB’s move tomorrow. For choice, I’d put money on them doing less rather than more as I have not heard of a 3D printer being delivered to the ECB Tower with which it might be able to make a few extra kitchen sinks.
Confidence Tricks
The US does not have anything like the Japanese Tankan Survey but it does have releases by the National Federation of Independent Business, which reflect sentiment at the more grass-roots end of the economy. Yesterday saw the release of the Small Business Optimism survey which showed another decline to 92.9 from 93.9, the weakest reading since February 2014 and a stark contrast to the figures we are seeing on the economy as a whole which looks to be doing just fine. That said, small business is always more cautious than big business which makes sense as those who are being surveyed are frequently owners of their own business and they are playing for money and not for matchsticks. The rest of the week is very light on numbers as far as the US is concerned and American markets will most probably simply track commodity prices which will be tracking American markets….a clear case the blind leading the dead.
Edge of Reason
Finally, I appreciated the many “welcome back” messages which hit my inbox yesterday, more than just a few of which were looking for my views on Brexit. At this point in time, it’s all very much a game of “spot the ball”. Neither side can offer anything truly revealing about the effects of a British exit as nobody has the foggiest what might or might not follow. But then again, Vasco da Gama, Christopher Columbus and James Cook didn’t know what was out there and that didn’t stop them. Columbus didn’t fall off the end of the earth and, without taking sides in any shape whatsoever, the flat-earth arguments of the pro-EU lobby in the UK seem to me to be rather insulting to a nation which invented the digital computer, radar and jet engine. The dire warnings uttered at the Shanghai G-20 were no better. On balance, I think Britain will vote to remain in the EU but one way or the other, Brexit will not spell the end of the world as we know it and we will all have to get on with it, irrespective.