Markets had a thoroughly miserable session Thursday with losses being taken across the board on equities as well as in credit spreads and even underlying bond markets.
Where to start? Although the drop in the Dow looks impressive - every stock other than JP Morgan and Goldman Sachs was in the red - and the collapse in both the Dax and the CAC by 1.827% and 1.876%, respectively, look downright scary, it was the way in which the bonds were taken to the woodshed that really made an impact with the Bund now trading at 0.45% and Gilts, just a few days ago below 1.00%, back up at 1.24%.
So is this the beginning of the end? Is this the first step in the long-promised precipitous collapse in the price of financial assets?
In all likelihood it isn’t. What it is, or at least what it most probably is, is a European version of the taper tantrum. As one old bond dog told me yesterday, “nobody has a clue what’s going on. The difference is that this time they’re admitting it.” On the back of the mixed signals coming out of both the ECB and the BoE, who could blame them?
Junkies
Over the past eight and a half years central banks have been steering the ship and if one believes that their sole purpose in life is to prevent recessions, then they have done a darned good job. They were most certainly not the drug dealers but in the aftermath of the debt crisis - let us not forget that the global financial crisis was nothing more than the bursting of a very, very large and toxic credit bubble - they turned themselves not into the managers of a detox clinic but into the providers of near endless supplies of methadone.
The economies of the world, represented by consumers, have paid homage to them and few of us can deny that when politicians failed to act decisively during the darkest days of the crisis, the central bankers took over. However, as much as power corrupts and absolute power corrupts absolutely, so by being able to lose endless amounts of cash as well as ZIRP and NIRP at struggling post-apocalyptic economies, central bankers found themselves being raised to a near god-like status.
In a crashingly boring and monotone way, Janet Yellen has turned the US interest rate ship around and has quite elegantly first withdrawn stimulus and now begun the long process of normalising monetary policy. She has quite clearly been through the Greenspan school of public speaking, which teaches how to talk plenty but to say very little. It was after all Alan Greenspan who coined the phrase, “if I turn out to be particularly clear, you’ve probably misunderstood what I said…”
St Mario and Mark the Magician, on the other hand, have tried to be clear which has now exposed them to the risks embedded in any form of contradiction and, as we know, both have quite significantly contradicted themselves in the past week. The price of this is to be found in both bond and stock markets, which are at the same time heading for the hills screaming. The very fact that bonds and equities were melting down hand-in-hand should suffice as evidence that there was no particularly deep thinking behind the sell-off. The gods are all of a sudden looking rather mortal and are coming back down to earth with a bump. Those who had subscribed to the creed find themselves with neither faith nor guidance.
US markets were doing the same but for different reasons. The rattling of “fortress technology” coincided with Europe getting cold monetary policy feet so as such the moves were not related. That said, the pervasive uncertainty of where markets are going and why is not dissimilar.
Tech correction
Although the monster fine imposed on Google by the European authorities is part of the tech correction, the fear that Apple might have run out of steam is of far greater consequence. Though still far from being a busted flush, Apple looks ever more to be behind the technology curve playing catch-up. Yesterday marked the 10th anniversary of the iPhone going on sale and I am myself at this moment sitting a long way from home tapping away on an iPad. In 10 years Steve Jobs and Apple entirely transformed the world. They brought us the app to replace the programme and the touch screen to replace the keyboard. That job is now done and the next phases in the development of punter-usable technology such as the internet of things or the rise in voice activation are neither of their making nor in their gift.
The guard is changing in the tech sector and this, by sheer coincidence, seems to be happening at just the time that Europeans have lost touch with their central bankers. I heard a pundit on the TV yesterday talking of the “US taper tantrum of 18 months ago”. The taper tantrum was in 2013; rates began to rise 18 months ago. I still believe that it is the dynamic interplay between dividend yields and coupons that will determine the direction of risk asset prices and on that basis the prevailing fear of a massive switch in asset allocation out of equities remains an unlikely scenario. Where would the money want to go?
Timing is everything
Elsewhere, Volkswagen Leasing came to market with a three-tranche, €3.5bn bond deal. Nothing wrong with that and one cannot even complain about the pricing for with the €1.25bn two-year FRN at three-month Euribor plus 35bp, the €1.25bn four-year FRN at plus 45bp and the €1bn eight-year fixed at mid-swaps plus 93bp there was no sign of the pricing being squeezed until it croaks.
My gripe is about the pricing process. The bonds were priced at around 5:15pm, London time with a footnote that the bonds would be free to trade at today’s opening. At that time of the day, the traders had already closed their books and had turned their minds to the pub while investors were left with open overnight risk in deeply nervous markets which might, for all we know, have gone into meltdown in Asia this morning.
The argument by investment banks that institutional investors don’t care as the bonds would be in the index anyhow and therefore they bore no risk is ill considered and downright rude. Index risk might be ubiquitous but it is not the only risk around. I took a small jar with a fixed income portfolio manager last evening who actually commented on how everything is now priced compared to everything else and nothing on its own merit anymore.
Only if you’ve ever tried to get a firm overnight price from an investment bank do you find out how little they’d be prepared to leave themselves open to the vagaries of overnight shocks but they seem to have no qualms of doing that to their own clients.
In a more benign world, the lead managers would have suggested to the issuer that, given the late hour and the extreme volatility, the pricing of the deal be postponed until the morning and they would not have had the audacity to price a transaction after many of the clients had gone home, only to hang them out to dry overnight long of spread risk.
Whether a bond is going to enter an index or not and what the relevance of that index should be to the investors’ portfolios is for the investors to decide and not the syndicate desks. As far as the latter are concerned, each bond is a standalone security and it should be treated as such.
In the event nothing tragic has occurred but it is clear that lead managers and their syndicate groups need to review their market etiquette and remind themselves that investors are just as much their clients as are issuers. Looking at the lead group, I see firms and people there who should know better.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. It is month end and quarter end and next week the summer formally begins with the Canadians and their southern neighbours celebrating their national holidays. Tomorrow, July 1, is Canada Day. Lower down, July 4 used to be the day when hyphens were locked away. There were no Italian-Americans or Mexican-Americans or Irish-Americans. On July 4 there were just Americans. I hope that even in this new, strange Trumpian America that many of us fail to understand, July 4 will produce the same sense of unity. We can but hope. Saturday the Lions play and on Monday it’ll be “quiet please” in Wimbledon. Time to do all the ironing.