Friday, 20 July 2018

On moral capitulation and Osborne's 'Plan A'

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Anthony Peters, SwissInvest Strategist

Before breaking out the bubbly and celebrating the 5.46% rally in the CAC yesterday or the 4.60% rally in the DAX or the 2,92% rise in the S&P, please bear in mind that we are running into that technical period around month-end and that in each of the previous three months we have experienced similar dramatic rises in stock prices, only for them to go into free-fall once the new month had begun and the shorts or underweights had been re-established.

I did hear one US commentator point out that the equity flows were pretty much one way only and that they were seeing no fading of the rally – that’s selling into strength to you and me – by real money which was being treated as a bullish signal.

However, most Street players are given to not attaching much credence to this leap in prices as so many of the previous ones have proved to be false dawns. Some call it cynicism, some call it realism, I’d suggest that it is simply total moral capitulation.

In bond markets, Monday brought cheer in the form of a successful Belgian bond sale but raising €2bn across four maturities isn’t exactly a groundbreaking bench test for investor appetite whereas today’s launch of a new Italian three-year benchmark bond will be of more significance. The mood, following yesterday’s rally in risk assets, is perky and I’d like to believe that this should bring out some money.

How much international demand there will be other than from the buyer of last resort in Frankfurt is not easy to gauge and to be honest, I never really believe the statistics of who the buyers were. Was it not once again our old friend Sir Winston Churchill who said that the only statistics he believed were the ones he had forged himself? At a yield of 7-1/2% or more, the new three-year bonds should do OK with domestic buyers but that will only represent €3-1/2bn of the total of €8bn which the Rome Treasury is looking for.

Should the auction flop, the recent rapid contraction of spreads in all eurozone bond curves versus Bunds could be eradicated pretty quickly. However, as with the equities, the likelihood is that month-end and index technicals will make the situation, no matter how grave it might be, look a lot better than it is.

More in macro land, Chancellor George Osborne is presenting his autumn statement today. Consensus – aided by the presence of more leaks than you’d find at a Welsh nationalist convention – is that he will have to downgrade his growth predictions and therefore will have to concede that his balancing of the budget will take a couple of years longer than had been planned. Already the journos are out calling for him to scrap “Plan A” and implement “Plan B” – he did state that there is no “Plan B” – or even come up with “Plan C”.

I might be biased – and unashamedly so too – but I agree that there is no meaningful alternative to “Plan A” and if it all takes longer to implement than had been hoped for, then that is not a failing of the plan. I suppose the critics would also have capitulated after First Mons and run up the white flag after Dunkirk. They’d have popped the keys to Government House in Port Stanley through the letterbox, courteously let Paris have the Olympics and disbanded the FA and the RFU and turn the All England Club into a turf farm. Nobody would ever support Derby County, Longwy or Castrop-Rauxel – in case anyone does.

I agree there is no meaningful alternative to “Plan A” and if it all takes longer to implement than had been hoped for, then that is not a failing of the plan

And before Chancellor Osborne has read the papers tomorrow morning, the Civil Service will be on strike to protect the pensions we can’t afford. The political class demands endless mea culpas from the bankers but doesn’t seem too keen to offer up any itself. Why does it seem to believe that it will instantly turn into a pillar of salt if it ever says: “Sorry chaps, we simply can’t afford it?” If putting the country right has to, among other things, come through levels of greater taxation, so be it – I don’t like paying higher taxes any more than the next person but compared with the seven years my old dad spent serving this country in uniform, it’s a pretty easy and harmless option.

However, if I am expected to pay tax in order to protect unsustainable promises which were made by electioneering politicians of all hues, then I might just get a little bit annoyed and write to my MP who is a chap who likes to be called “Dave”.

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