Wednesday, 26 September 2018

On long grass, suckers and corporate treasurers

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  • Anthony Peters

Anthony Peters sees a Fed ruse and welcomes back old friends.

Just to remind ourselves, the US stock markets are racing from new high to new high. Wednesday, it was the Dow’s turn as it closed at 15,746.88 points which gives it a year to date performance of 20.17% and a 12-month return of 21.76%. Its sister index, the broader and, in truth, far more relevant S&P 500, although it missed a record high by just over one point is, however, leading the way with a year to date return of 24.14% and a 12-month figure of 26.96%.

European markets have been playing catch-up of late and although they are still behind the US in terms of year to date performance, their annualised returns are very similar indeed with the CAC at 25.73%, the Dax at 25.00%, the IBEX at 28.41% and so on and so forth.

The FTSE is the laggard in this rally but if one steps away from that index which is knee-deep in Eastern European commodity stocks and looks at the broader, more “British” FT250, the year to date performance is in line with the peer group at 24.48% year to date and 28.78% over the past twelve month period.

…whether the sucker is the investor or the trader I will leave to you to decide but I can assure you, it is not the corporate treasurer

The US was driven higher yesterday by a research paper which came out of the Federal Reserve which suggested that the declared intention to focus on employment would most likely lead the FOMC needing to be cautious in terms of withdrawing monetary stimulus. In headline speak, that means tapering being off the table for the while. Do I not detect a bit of Abenomics creeping into Fed thinking? The more we stimulate the economy, the more the economy feels stimulated… the more cocaine we snort, the happier we become… .

There is of course a school of thought which suggests that the Fed might be softening the markets up for a shock in the Labor Report of tomorrow where by the effect would be the same, irrespective of whether the shock would be to the upside or the downside. If the number is weak, don’t worry because we are on the ball and will not taper and if the number is strong, don’t worry because we’re on the ball and will not taper. Simples. The market has decided that tapering risks are to be found in the long grass.

Big, old American names

Meanwhile, there has been a sense of déjà vu in the European bond markets as the swap arbitrage window has opened and we have been seeing much loved US corporate names come to market such as Coca-Cola and IBM. Once the mainstay of the Eurobond market, these were names which were blindly bought and which populated the portfolio of every Belgian dentist. (For those too young to remember, the Belgian dentist used to be the equivalent of the American “mom and pop”, the investor who went to the bank, who bought bearer bonds over the counter in any recognisable name and which he kept at home in the safe. He then clipped the coupon – coupon from the French “couper”, to cut – and drove to Luxembourg to collect his interest and to have a jolly good lunch.)

Over the years, the grand American issuers have disappeared from the scene as fractions of basis points in funding cost would determine what market a treasurer would choose to issue into. Long gone are the charming but vacuous platitudes about wanting to broaden one’s investor base.

Nevertheless, for an old dog like me, it is nice to see the good old names back in the market. However, there is a key problem which such bonds bring with them. The European trading desks no longer have knowledge of the US credit and the US desks lack insight into the currency. When some years back it was believed that any bond in any currency could be priced on a comparative value basis over the generic credit default swap, it worked. I would have thought that such self-deception is a thing of the past and that players should have learnt that every bond has a life story and hence a level of liquidity and hence correct pricing of its own.

Sadly, this means that many of the cross-currency arbitrage deals will eventually find themselves orphaned in the secondary market, at the very latest when it occurs to traders that pricing a rare Coca Cola bond in euros on the same basis as an entire liquid (no pun intended) curve in the US is an exercise in futility. Alas, as P.T. Barnum is supposed to have said, there’s sucker born every day – whether the sucker is the investor or the trader I will leave to you to decide but I can assure you, it is not the corporate treasurer.

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