Sunday, 19 August 2018

On dirigisme and symbiosis

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Anthony Peters fears a Banking Union “revolution”; also the buy-side and sell-side need to play nicely.

I think I’ve had enough of this nonsense about markets and the Crimea crisis.

The political temperature is rising and rising – or is it rising and falling? – but market movements, although chasing from bull to bear at the drop of a handkerchief, don’t seem to be showing any particular correlation to the ebbs and flows of rhetoric and action.There seems to be more fear about being caught at the top of a bubble than there is of Rambo, Robocop and the Terminator landing together in Sevastopol in order to teach those naughty, naughty Ruskies a lesson in democracy.

Big market reversals are not supposed to happen until Tuesday but both European and American risk asset markets rallied nicely albeit probably as much on the fact that they were technically well oversold as due to any particular bit of news.

That should not detract from the rather positive looking manufacturing data out of the US which saw both February Industrial Production and Capacity Utilisation comfortably beat forecasts. The fly in the ointment was perhaps a weaker than expected March reading of the Empire State Manufacturing Survey although this one is pretty parochial – it only covers 200 executives in the state of New York – and it is also frequently off forecast.

Birth of a Banking Union

I was happy (not) to read of yet another Franco-German get-together in Berlin – this one took place on Friday – at which the thorny issues surrounding banking union (my thanks to Commerzbank’s otherwise superb research team who reported that “Europe is on the brink of a baking union”) were being ironed out. There are still plenty of objections from the German side which continues to suspect that it will always end up being the one holding the baby but this does not French Finance Minister Pierre Moscovici from declaring that a “real revolution” lies ahead. Moscovici is another one of those very special SciencePol and ENA alumni who love what we have learnt from the French to call “dirigisme”. When one of those announces a “real revolution”, I shudder.

We live and work in a sector which is already regulated to within an inch of its life and I hear a fully paid up, card-carrying Socialist prize “fonctionaire” hailing a revolution. Yikes!

I passed through the offices of a major asset management company yesterday where I had the privilege of spending some time chewing the fat with its global head of rates trading. He confirmed what both the buy side and the sell side are experiencing, namely an environment in which it becoming increasingly difficult for investors to construct the portfolios they wish to and to manage those portfolios in an efficient manner. Just another case of the widows and orphans in who’s name all this regulation is meant to have been implemented now paying the price for the authors of said rules to enjoy a peaceful night’s sleep.

Buy-side, sell-side symbiosis

The same visit had me with one of the senior folks in the credit division where he – I can at least reveal that my partner in the meeting was male – was trying to get his arms around the tricky issue of absent market liquidity. I have taken quite a liking to the figures which reveal that aggregate trading positions in the bond market in 2007 were US$254bn but that they are now closer to US$37bn – roughly one seventh of what they were.

However, that only tells part of the story as modern pot deals with open books no longer rewards the hard-working lead manager which in turn leads to absence of banks taking ownership of transactions they bring to market and hence any responsibility for maintaining secondary liquidity.

Mind you, asset managers are also notoriously promiscuous when it comes to squeezing an extra penny out of a bid or an offer in pursuit of “best-ex”. Bond trading is evermore looking like internet shopping where loyalty and service are no longer such important parts of the equation. I do, however, suspect that we have passed the high watermark in this area. When liquidity is hard to come by, the buy-side will need to re-establish relations with the sell-side – the Street for once has something asset managers need but regulations and directives haven’t yet caught up with that fact – nor have compliance departments and rules of best practice. 

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