On European bond bashing
Anthony Peters: Yippee! The End of the World Part XII has just been cancelled.
Eurozone inflation remains at zero, or it did in April, defying many suggestions that it was heading further south thus leaving the core figure unchanged at +0.6%. And yet, the atmosphere on the Street was one of fear and loathing. The two of the first three calls I made yesterday were to people feeling suicidal after having watched their year to date P&L evaporate in 48 hours.
Have they been dumb by not listening to Bill Gross and his pronouncement that the short Bund trade was the slam-dunk of a lifetime or was their stupidity to have followed the ECB which led them up the path like the Pied Piper of Hamelin?
I’m sure we can go over every utterance by ECB supremo Mario Draghi without finding even the vaguest of suggestions that Bunds were cheap at a yield to maturity of 0.06% but equally there was never a warning from the central bank that markets might be at risk of losing themselves in irrational exuberance either.
One way or the other, the precipitous fall in European bonds markets on Wednesday did not stop on Thursday and at the time of writing early Friday the 10-year is trading at 0.36%. This has the vast majority of investors’ Bund books still hugely on-side and even the current 10s are only ¾pt off their life-time average price. The issue on hand is much more profound and one which needs to be thought through.
On one hand we have a Street which no longer knows how to make markets and where blind and abject cowardice by primary dealers is encouraged and lauded for being sound management of risk. On the other, we have the increasing cost of leverage which causes sharp rises in volatility and the prompt calls by prime brokers for higher margin postings to force quick selling into a market with no bid. Thus, what we have seen in the past few days might not quite have been the perfect storm yet but it did demonstrate what Jamie Dimon meant when he, in his own words, warned the authorities that you can’t stop the rain by taking away the umbrellas.
On Tuesday of last week, the Greek 10-year note hit its low point at a yield of 13.43%. As of this morning, it is at 10.35% which translates into a 12-point price rally. If, by the end of the week-end, the meetings between the reshaped Greek negotiating team and the creditors have reached an agreement, any agreement, the bonds will surely close on Monday night at 65.00 or around 9.00%. Relief all round, risk on and plenty of back-slapping that new pumps have been loaded onto the boat which remains holed below the water-line.
Thus the ECB will be able to nonchalantly brush off its lapels and take the stance that the Bund rout is all about the eurozone being as safe as it always was and that if folks wanted to trade against that axiom, any money lost would have been entirely of their own making. Yeah, sure, and if my grandmother had had wheels, she’d have been the Number 22 bus. The Grand European Project is now strapped together with so many plasters and bandages that it has become nigh on impossible to recognise what it actually looked like originally.
I understand that the new Greeks, just like the old Greeks, will promise to push through the agreed privatisations. Weren’t those supposed to have happened three years ago? What is it that is supposed to make us believe this lot’s promises – Syriza was specifically elected on a platform which stated very clearly that it would never contemplate selling state assets – are worth a Drachma more than the other lot’s? Well, I guess if it keeps the flies off the bride, we’ll just have to go along with it.
Today the world will be running on two cylinders with the May 1 holiday gripping pretty much all but the Yanks and ourselves. We’re off on Monday instead.
The spiritual home of Mayday is surely Russia where Vladimir “Put me in” Putin can reflect on a huge rebound in Russia’s fortunes. Foreigners have been pouring money back into the country leading to the currency having stabilised and the central bank now being faced with the need to cut rates further. I guess the West is coming round the accepting that Crimea is no longer a subject, that Ukraine will most probably have to live with low-level conflict in its Eastern fringes for years to come and that fighting Russia, even on the economic front, is doing nobody any good at all. World War III will simply have to wait.
Ongoing conflicts in Syria, Iraq, Afghanistan, Libya and now in Yemen might have finally taught the Americans that the law of unintended consequences applies to their foreign policy moves as much as it does to others’ and that stirring up unrest, no matter how covertly, in Russia’s back yard will do them no good at all. The Russians, like it or not, make better allies than enemies when there is unrest in the “-stans”. Look for the recovery of Russia to pick up in pace rather than to diminish.
Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. Once again, I have no need to check the calendar to confirm that this is a long bank holiday week-end; all I have to do is to look at the met report. At least we have the snooker world championships to watch but without Ronnie O’Sullivan in the last four, even that’s not much to look forward to. Oh, and isn’t there supposed to be a boxing match between some guy and some other guy going on? I might just pick up a book.