So what was the surprise package yesterday? It was, I would suggest, the sharp rally in US stock markets after the FOMC announced that it would be leaving monetary policy unchanged. Why so? One must be led to believe that the Street wasn’t quite as long as had been assumed and that more players than might have been expected were positioned for the tightening move.
The Dow flew by 0.9% to close at 18,293.70 and the S&P by 1.09% to 2,163.12, and this morning Asian markets are following. The Nikkei, was closed today but I doubt it will hang on to the best part of yesterday’s 2% rally. It makes absolutely no sense as the yen, having weakened to close to ¥103 to the dollar in the immediate aftermath of the BoJ’s policy move, is back near its own recent high at ¥100.25. Just imagine where it would have been, has the Fed had the guts to tighten!
Yes, the word of the day has to be “guts”, none of which were in evidence at the FOMC yesterday. Janet Yellen’s post announcement explanation as to why the committee had opted not to kick the ball into the open goal sounded flat and deeply unconvincing. Wanting to see more confirmation of developing positive trends might have held water a year or so ago but by now that excuse is wearing horribly thin and is looking desperately moth-eaten. As my maths teacher always, and with great justification, wrote: “Could do better”.
There is an explanation that is being bandied about which I don’t like a lot but which might contain a grain of truth. The Fed is, by and large, populated by instinctive, if not declared, Democrats. Donald Trump has made his displeasure with the nation’s central bank perfectly plain and there is surely some fear among senior executives as to what might happen to them, were he to become president. Although the Fed is fiercely apolitical, there is a candidate out there – and one with a growing chance of winning – who has very firmly put it and its recent performance on the political agenda. Tightening now might have looked like a sop to Trump at the same time as taking money out of the pockets of less affluent voters shortly before the election.
Please don’t get me wrong; I am in no way trying to accuse the FOMC of playing electoral politics but I do wonder whether the odd voting member’s fingers might have been twitching when they put their hands in the box which contained the “move” and “hold” paddles. Well, whether right or wrong, justifiable or not, rates are on hold. I have heard more than one suggest that they will have to move at the next meeting in December. Wrong. The next meeting is in fact on November 2 although one has to concede that being just six days before the election it will be a lame-duck session and not much more than a convivial coffee morning.
I’ll have a ’P’ please, Bob
That now takes the central banks off the agenda for the coming weeks and markets will have to learn to think for themselves again. We are only a week away from the end of the third quarter – where has the year gone? – and minds will soon be turning to protecting the year’s P&L, in as much as there is any P&L to protect. European equities have not exactly knocked the cover off the ball and any European investor who went into the June referendum long sterling took a spanking on that position too. So far the euro has not had a bad year but all those who equally bet on a US rate rise and who had been long dollar assets have also been disappointed. The only area of joy, if that’s what you want to call it, has been in European bonds but even that has only done nicely against a backdrop of next-to-nothing yields.
I learnt a long time ago that in a crap year it makes no sense throwing everything at the fourth quarter. The key decisions have largely been taken and delivering a storming last quarter to the year does nothing other than to encourage management to set the next year’s targets that little bit higher. Fortunately the uncertainty of the election outcome offers a great excuse to play close to home. Elections are on Tuesday, November 8. That Friday is November 11 and Veterans Day. Less than two weeks after that, on November 22, is Thanksgiving and then the show is over. On December 14 the FOMC meets.
There is of course still plenty of sting in 2016’s tail – a quarter of the year is still ahead of us. The Bayer/Monsanto deal is still out there and it has the potential to set new benchmarks and standards for the corporate bond markets. With both companies jointly and severally right within the crosshairs of the ECB’s buying programme, it might find itself the new equivalent of the erstwhile CLO buyer. The merger creates the paper the ECB needs and the ECB provides the financing that Bayer needs; the perfect symbiosis… and don’t tell me that this subject was never raised between Bayer and its bankers. Incidentally, Deutsche Bank’s silent chairman, Paul Achleitner, sits on its board.
Deutsche rules
Poor old Deutsche Bank; it can’t be more than a year ago when its share price was still in the €30s – it closed last night at €11.275 – and it was still being hailed as the only European bank which could bat on the same pitch with the American investment banks. It was, in many people’s eyes, the European champion on the global stage. In 12 months it has gone from being Germany’s Goldman Sachs to becoming its Royal Bank of Scotland.
Sure, the American banking system has its own problems – look at Wells Fargo, the Teflon bank – but it has emerged from the global financial crisis with a few fringes of its integrity intact and a desire and an ability to recover and to fight on. European banking is skulking in the corners, ashamed of itself, and still trying to behave as though it can thrive in a world of over-capitalisation and over-regulation while exposing itself to no risk. In Anshu Jain, Deutsche had a convenient whipping boy – as Barclays did with Bob Diamond – but it really only has itself to blame.
As far back as I can remember – no, not to the Battle of Waterloo – Deutsche had always been suspected of using the power and depth of its balance sheet to bury its mistakes. It was, in fact, the reason US investment banks militated so vociferously against Glass-Steagall. Against the strength of Deutsche’s accessible capital base, they felt they were fighting with one hand tied behind their back. They were. The difference was that Deutsche had years more experience in juggling balance sheet risks and convincing itself that the risks weren’t risks at all. Siegfried’s mythical invisibility cloak?
But the real risks remain in over-regulation. Bankers find themselves forced to do the business they can get away with and not the business that necessarily makes sense. I wrote yesterday of my dinner on Monday with the deputy treasurer of a UK bank. His new treasurer, only recently appointed, is a compliance specialist for whom business rationale is an alien concept but for whom ticking the boxes is paramount, irrespective of who invented the boxes and why.
Regulation and compliance does not explain why Deutsche got itself into the mess it is in but it goes a long way to explaining why it is struggling so hard, and seemingly failing, to get out of it again.