As recently as Thursday as we came to the end of the first quarter I wrote that Fed Chair Janet Yellen’s speech at the Economics Club of New York set the scene for a quieter and calmer investment environment for the coming period. Just to hedge my bets, I added that there were more than a few elephants in the room…
“Away from that, there is little space left in the room which is now jam-packed with a veritable herd of elephants. There are Chinese elephants, Brazilian elephants, Greek elephants, Russian elephants, hydrocarbon elephants, presidential elephants, elephants from all hues of the political fringes and last, but not least, Brexit elephants. Janet Yellen might have calmed markets but she has not changed the world.”
Little would I know that after Friday’s US Payroll report had come in pretty much bang on expectation, markets would begin to fall to pieces again as one of those elephants rose and began to trumpet the recall. It is of course - who else could it be? - the Greek elephant which once again stands centre stage.
We all already know that representatives of the Troika, which isn’t allowed to be called the Troika any more, are due in Greece this week and that they have a couple of weeks of auditing ahead of them before the next wave of financial aid is due. And we all know that Athens hasn’t hit too many, if any, of the targets set. How could it?
We also know that, some way or other, reasons will be found to let the country off the hook and that enough excuses will be found to permit rules to be broken and for funds to be disbursed. We haven’t spent this much time and money to let Greece just disappear into the abyss this far down the line.
IMF
Enter stage left, Christine Lagarde. Not for the first time the voice of the IMF has echoed through the corridors with stark warnings that it, as representative of the rest of the world, isn’t tied to the “political will” which holds the Eurozone project together. And do not assume simply because Madame Lagarde is French that she will toe the party line from Paris.
The words she used were: “We are still a good distance away from having a coherent programme that I can present to our Executive Board.” Around it, she has expressed doubts as to whether “…we can indeed achieve progress in a climate of extreme sensitivity to statements of either side”. Curiously, Lagarde’s position was revealed by none other than WikiLeaks.
In some respects, none of this is a huge surprise and many sceptics, myself included, have known that the Greek crisis is far from over. We have, nevertheless, taken our eye off the ball. The IMF has repeatedly threatened to throw Greece under the bus but in our innermost of innermost thoughts, we have blithely assumed that these threats were largely empty and that when push comes to shove it will not walk away.
The current exchanges between Prime Minister Alexis Tsipras and Madame Lagarde point towards an IMF that hasn’t simply rolled over. On that basis, Greece and the entire single currency project are back in the limelight and the next fortnight – I think the audit is set to be completed by April 14 – could prove to be very volatile.
European equities already took a drubbing on Friday – DAX -1.71%, CAC -1.43%, MIB -1.88% - while US indices traded higher. As the markets open again here, the indication is that they are not in the mood jump on the New York rally. We shall see how the day pans out.
Bonds
I saw a headline this morning quoting an organisation I have never hear of called Fideres saying there has been a “systemic under-pricing of corporate bonds by major dealers, which may have cost companies as much as US$18bn between 2010 and 2015.” I don’t frequently use the term “bullshit” but this has to be one of those occasions. Albeit without evidence – I have not seen the publication - I can only presume the “study” is based on a calculation of the amount by which bonds have tightened in the aftermarket and which is being seen as mispricing.
If these guys are so clever, I hope they were long of all the thousands of issues which have not performed. I suppose they are of the ilk that believes trading is dead easy – all you have to do is to buy it at the bottom and then sell it again at the top, allowing for millionaires of greedy oiks to spend their lives driving Ferraris and shooting fish in barrels. If these people are so darned clever, why are they writing about it and not doing it?
I recall the US$49 billion Verizon issue of September 2013, of which I estimated at the time US$1.3bn had been given away to investors on Day 1. On reflection, it was one hell of a gutsy trade and I’m pretty sure that both the board and the management of the company knew the risk being taken, and the cost of that risk. You don’t try to knock out the first-ever issue of that size without a big old sweetener for investors.
Markets are made up of supply and demand. In past days these would have been gauged in advance by discreet-sounding conversations between dealers and investors. In a world of eternally level playing fields and 100 ft Chinese Walls, that is now no longer possible. The price to be paid is investor-driven pricing. Banks give guidance as to where they think pricing should be but the end of the “bought deal” means that the actual issue price is determined by markets. I see more tightening of initial guidance than I do of widening. To accuse banks of “systemic under-pricing of corporate bonds” makes my blood boil. Rant over.
Have a good week.