If it had been up to me, I would not have taken quite as much heart from the supposed dovishness of the FOMC’s post-meeting statement but others in the markets were less concerned and off they went, once again, to the races.
In an otherwise largely unchanged statement from the last one in June:
“Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2%”
became:
“Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2%.”
Momentum
And this is what drove all three of the main US indices to new all-time highs. I’ve been watching the Fed for a long time now and I can’t extract much that would have me discount the probability of a third tightening in December. Methinks one either thinks it will happen or one thinks it won’t, the rest is a matter of momentum.
On the subject of balance sheet reduction the statement reworded this:
“The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”
as this:
“The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.”
On the subject of momentum, the euro/dollar trade, which has also been a one-way bet for some time now, broke new ground with the parity surging through US$1.1700 with some analysts quite sure that this is still only a staging post on the way to US$1.2000 or even US$1.3000. So although at its closing of 21,711.01 points the Dow is up 8.05% year-to-date. If looked at in euro terms, it is now 1.55% in the red. Thus, again in euros, the FTSE, which is only up by 3.73% year-to-date, has lost less for European investors at -1.02% than the surging Dow.
One of my mentors taught me in the 1980s that investment performance is 70% in the currency, 25% in the choice of asset class and only 5% in the stock pick but that investors waste most of their efforts by directing their efforts in the inverse proportion. I suppose it’s because there’s no index to hide behind, and in currency selection portfolio managers and asset allocation committees would have to stand up and be counted. The euro has appreciated by 12.25% against the greenback since January 2 so whoever has not had that trade on can spend as long as they like banging on about Bund yields and 2-year Treasury note shorts and whatnot, but apart from some of the tech stocks they’ve missed the best game in town. That is, of course, unless one held Bitcoin, which has rallied 153% to US$2,564 from around US$1,000 at the beginning of the year.
“Oh!” I hear you cry, “that’s all for geeks.” That might be true but there are an awful lot of geeks who have made eye-watering fortunes by owning the crypto-currency since early days but didn’t the same Pollyannas have same to say about Google, Amazon and Facebook not so many years ago? I am reminded of a Gilts trader I met in the mid 1990s – his name escapes me – who had been made redundant but who had taken his £50,000 redundancy package and invested half of it in Microsoft and half of it in Intel stock. We all thought he was mad…
Miss Deutsche
This morning Deutsche Bank reported and a pretty picture it was not. Q2 revenues were down 10% on the same period last year and at €6.62bn missed consensus of €7.1bn by country mile. That fixed income revenues were off by 12% does not surprise – the peer group has been struggling in that space too – but it was the equity department that took it on the nose with a decline of no less than 28%. Deutsche’s regulatory travails are coming home to roost and it seems as though, even if John Cryan has a vision of what DB will be when it grows up, the controllers of the global investment banking wallet either haven’t been told or don’t quite believe him.
Deutsche probably still has the strongest potential investment banking platform in Europe but lax regulatory controls turned the mighty bank into a bit of a pirate ship and we know what American authorities do with foreign companies that break the rules. We also know what they do with their own, especially if the former chairman and CEO happens to be secretary of state. Last week ExxonMobil was fined US$2m for breaking rules on Russia-related sanctions while under Rex Tillerson’s watch. US$2m? They’re having a laugh, aren’t they? Secretary Tillerson’s last reported holding in the company on December 1 2016 was worth over US$200m. His company breaches sanction rules and only gets fined US$2m. That’s the company, not him. If I were Cryan, trying to stabilise the Deutsche Bank ship and having been milked to within an inch of its life by the US Department of Justice, I’d be spitting nails.
More Brexit
Finally back to the UK where Brexit confusion rules supreme. I have so far read or heard the opinions of 1,732 different people on the subject and between them they have expressed 14,768 conflicting views on what the outcome might, ought or will be. An elementary school playground during morning break looks like a well organised affair in comparison.
Running a business is not a political matter and it’s about time that the leaders of the political parties took that to heart. Playing Punch and Judy with the jobs of a 32m national workforce is shameful. Whether one is happy or unhappy with the outcome of the referendum is not relevant. Whether the vote should have been 50% of the electorate or, as it was, 50% of the turnout is now also a matter for historians. It doesn’t even matter anymore whether a rerun would yield a different result and planting landmines for Theresa May to step on does nobody in the country any good at all.
Maybe the PM should call in the leaders of all the parties and try to work out a joint strategy. Even the Liberal leader Vince Cable, formerly the great voice of realpolitik, might grasp that trying to turn the clock back does not gain time but costs it. I live not far from the industrial Midlands and those I meet don’t care any longer what the outcome is, so long as they have a clear view of which wall they are banging their head against.
All Westminster can come up with a plan to ban new internal combustion engine cars from 2040. How they want to generate the electricity for 30m cars is not clear, or where the raw materials will be found for the batteries if the whole world goes electric at the same time. Last year I recall the NHS being asked to keep its air conditioners on low as the UK was backing up against capacity limits in power generation. I suppose that if we run short, we could charge our electric cars from petrol powered generators…