Sunday, 23 September 2018

On curve configurations, conflagrations and carnivals

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Anthony Peters returns to a market muddle. 

It might be the result of my becoming older and more sceptical (that’s “polite” for cynical) but it might also be because markets seem less open to the same variety of manageable interpretations which they once appeared to be but I return from my 10 day break not having had anything to do with the goings on either in news-print of by way of those manifold technical toys which bring everything which is going up or down live to wherever we happen to be. Thus I return this morning to a blank sheet of paper.

Sure, I did get the bit with the US mid-terms but I cannot go without mentioning that I watched a full 30 minute news programme on the BBC on Wednesday last without finding a single mention of the poll, let alone of the outcome. Not bad in a country which seemingly believes itself to be more closely bound to the English speaking cousins over the pond than it does to those funny foreigners beyond the Channel. I suspect a breakdown in the flood-lights at Hartlepool FC would have stood a better chance of being reported.

Alas, coming back to that said blank sheet of paper, the overwhelming surprise is the staggering rally in risk asset prices. The S&P has cut through the much-vaunted 2,000 point barrier like a hot knife through soft butter while oil continues to tumble.

I’ve had a few bad calls this year – one always does – but none quite as precisely wrong as my suggestion that WTI looked like a good buy at or around US$80.00. There is always a chicken and egg situation in pricing equity markets when hydrocarbon prices are in retreat. Lower energy costs generally benefit everyone other than energy producers (and as a far as I can tell also motorists, as I detect no meaningful lowering of prices at the pumps) so there is ample fundamental justification for the risk rally but on the other hand oil does not usually get cheaper because the global economy happens to be “en fuego”.

Pricing in accommodation

Principal primary indicators – of which oil is just one – are certainly pointing more towards an anticipated slowing in global economic activity than towards the sort of continued recovery which Europe so urgently needs in order to assist it in lifting itself out of its current torpor. Thus equities are pricing in a more prolonged period of accommodative monetary policy on the part of the Fed – Q3 interims were satisfactory though not barn-storming which can barely be seen as the trigger for the rally to new all-time highs – while bonds, in my way of seeing things, seem generally to be prepared to price in a more imminent return to a Fed-induced normalised yield curve configuration.

The Eurodollar strip reflects the postponement of policy tightening by a few months but, at this point in time, not in any way its freezing.

The credit indices, though much improved on their worst of four weeks ago, are not quite back to pre-bungee jump levels. The S22 iTraxx Xover closed last night at 342/345 but it seems to be on a mission this morning, opening 337/339 and ready to break new ground; it started life at or around 334.

It will take me a few days to get fully back up to speed. The fact that the US is closed for Veteran’s Day today will help by giving me a bit of breathing space. At these levels I can’t yet work out whether the markets are a better buy or sell. Judging by what I hear of business volumes in my absence, nor can many of our clients.

Remembering the Great War

Many of my readers will be aware that I have more than just a passing interest in military history and that the Great War is one of my key areas of interest. This year’s centenary of the outbreak of that conflagration should be of particular interest to me, but I am growing rather fed up with the grinding sentimentality which is taking over from the actual acts of remembrance. Genealogy websites are having a field-day selling their wares with sepia pictures of men in uniforms. ’nough said. I shall, however, join the rest of the country in observing two minutes of silence at 11:00 am.

By chance, this will be 49 minutes after Cologne and Mainz go nuts as the 2015 carnival officially begins at 11.11 am their time. Thus I wish them a hearty “Alaaf” and “Helau”, respectively. It’s a mad, mad world.

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