Saturday, 23 June 2018

On Bunds, chartists and BES

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  • Peters 475px June 2014

Here’s the question: is the yield on the 10-year German Bund going to fall below 1% or not?

I’ve played around with the chart tools a bit and have worked out that, all things being equal and running with the assumption of our staying within current trend lines, it ought to happen sometime between September 24 and October 20. How about that? Well, the fly in the ointment is that I really struggle with technical chartism.

I have always thought of chartists sitting around a table in a darkened room chanting “Is there anybody there…” and yet I pull up charts from time to time in order to help me put a bit of structure into understanding the way in which markets are moving. In quiet environments it is good to know where the key support and resistance points are, for if enough people trade to the technicals, they will become self-fulfilling prophecies.

Dealing with Bunds yields in a technical fashion is not that difficult as the high was 1.97% which was hit on January 2nd, the first day of this year’s trading. Since then it has been more or less one way traffic. Is this because the chart tells us that it has to be that way or simply because the collective eurozone economy stubbornly refuses to go anywhere?

Consumer Price Inflation continues to struggle with the most recent YoY estimate for the EU as a whole pinned at 0.4% and falling. Even the most fervent of Panglossians are now stretched to find anything exciting to hang their hat on as activity in Germany, the driving force behind most things eurozone, is showing signs of flattening off.

As for the next door neighbour, France, well best one leaves that one alone as François Gérard Georges Nicolas Hollande busily fiddles while the country’s industrial base burns.

Making the BES of a bad situation

There had been a bit of a fillip once it had been announced that the Portuguese government had stepped in with €4.9bn in order to bail out Banco Espirito Santo. I had one very pleased hedgie on the line who had sold CDS protection last week in the mid-600s and who had bought it back yesterday in the mid-300s. That does not make a silk purse out of a sow’s ear and although senior debt holders should be okay now, the value sub-debt is still an unknown quantity. One might just as well try to pin the tail on the donkey.

I was, however, rather taken by Mint’s Bill Blain yesterday who imparted the following pearl of wisdom: “I recently worked out that Europe’s banks have raised about €400bn of new equity and €50bn of new T1 CoCo/AT1 since the crisis began in 2007. In that time NPLs (non-performing loans) within the European banking system have increased from €511bn to over €1,220bn… which basically means there is still a rising capital shortfall of €260bn odd… and only countries where NPLs are falling are UK, Ireland and Germany! Essentially, European banking is still pants.”

Bill and I share the opinion that closing one’s eyes, no matter how firmly, doesn’t make problems go away and that Espirito Santo is not the tip of some mega iceberg but just another one of many, many run-of-the-mill icebergs floating in the sea of European banking.

What was interesting though was the way in which the bank was knocked over, taking the shareholders with it. Credit Agricole which owned 14.6% of BES has written these off and taken an upfront charge of €708m which will leave it with a paltry €17m for the second quarter. Just at the time when the ECB is gearing up to become the super regulator for all eurozone banking we are reminded just how differently things work in different parts of the union. I’m not certain that the central bank is adequately equipped to deal with the many various cultural differences within the single currency area and would be prepared for more BES-type landmines to go off unexpectedly.

That aside, markets were eerily quiet and it was only the second trading day of August. If you think it can’t get worse, I’d think again. Oh, and do I believe that Bunds will drop below 1% between September 24 and October 20? I most certainly would not bet against it.

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