Tuesday, 25 September 2018

On Caledonia, Gilts and the pound

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Anthony Peters sees winners in the Scottish-inspired volatility.

Monday had something for everyone. There was a rich flow of new issuance across the credit spectrum of and, should anyone not have found the offerings engaging enough, there was plenty to talk about with respect to the Scottish referendum and the shock polls from the weekend, or events surrounding the Ukrainian crisis and the West’s struggle to find the right measure of response.

Early in the day, I was in touch with a Scottish pension fund which had decided to postpone any trading decisions until after the referendum a week on Thursday. Although the fund in question is not of the market-moving variety, I shared this news with a senior Gilts man who came back to me canvassing my opinion as to whether the Sunday Times poll, which had showed the Yes campaign to have taken the lead, should be positive of negative for Gilts.

Having already written in yesterday’s column that I thought it would be positive, as risk averse cash exiting equities would take the flight to quality route and end up in Gilts, I stuck with my view that they probably should benefit from the uncertainty . As the Bank of England owns £375bn of the total of outstanding Gilts of £1.056trn – let’s call that 35% – there is also a significant hard-core investor who will not be selling, irrespective. This offers the UK bond market unusual support in a crisis. In the event, the 10yr traded in no wider range than would be expected on any given Monday. In fact, both its high and low were inside the trading range of Friday. I think therefore that we can, with hindsight, call yesterday a non-event in Gilts.

What rout?

The press and the media seem to want to create a storm in a tea cup by pointing to a rout in Scotland related equities but here too I see nothing special other than Lloyds Bank which lost 2.43%, closing at 72.20 pence, but again, in the greater scheme of things, this wasn’t a price move which stood out in the crowd. Royal Bank of Scotland was only down 1.3% which was a darned site better than plenty of listed companies with no Scottish connection at all. The main loser was the pound which was already on the slide and getting short seemed to be the shooting-fish-in-a-barrel trade of the day.

Another keen Scotland watcher whispered in my ear yesterday morning that the SNP’s internal polls even had a 53% Yes vote but it must be added for the benefit of those of a weak disposition that this is 53% of voters who have decided which way to jump. The Guardian published another poll last night which had the Yes vote at 38%, the No vote at 39% and a still significant 23% undecided. That takes us back to “too close to call”, albeit with the momentum still favouring the Yes campaign.

While sterling might look weak against the dollar, it certainly does not versus the Japanese yen against which is it uncannily stable. In other words, even without a kilt and bagpipe referendum, the yen is falling against the greenback at more or less the same rate as the pound and, although it softened against the euro too, it is still no weaker than it was a couple of weeks ago. For a change, the four major currencies all seem to be trading to their own agendas and that will please the forex people who have been dying of boredom this year and who have, given the lack of vol and vol (volatility and volume), seen their seats becoming increasingly more unsure. A good run from now through to the end of the year might just save the odd job here and there on a part of the trading floor which is not at all happy.

The Finnish line on Russia

Meanwhile, the EU is tightening the sanctions noose around both Russia’s as well as its own neck. The latest package of capital market restrictions has been decided but deferred as Finland threatened to veto the whole package if it was not held over until the progress of the wobbly cease-fire were taken account of. The Finns quite rightly observed that it is easier to impose sanctions than it is to lift them again and, apart from that, if there is one member of the “old” West which understands how to gauge the “Ivan”, then it has to be Finland.

The Finns have a bit of history on that front and it seems to me that the better part of the crisis has been brought about by the West assuming that because the Russians look like we do that they also think like the rest of us. Russian culture is neither better nor worse than ours; just different. Not appreciating and accepting the differences is the West’s Achilles’ heel. Russians don’t make that mistake when dealing with the West and are hence seemingly always one step ahead. That aside, Russian people have for generations lived with the principle that no hardship is unbearable if it is for the benefit of the motherland. In my view, the West needs to do a bit of a rethink…

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