Thursday, 19 July 2018

On punch-ups, snow jobs and swans

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Anthony Peters waits on Athens, shudders for New York and winces at Moscow.

Whatever the outcome of Sunday’s election in Greece was, it most certainly was not a black swan event and thus markets took the anointment of Syriza pretty much in their stride. That does not mean that it is over before it began.

Athens and Berlin were talking as much at cross-purposes on Monday, post factum, as they had been on Friday, ante factum. I suspect the markets are whistling in the dark as there has to be quite a punch-up ahead. They do say that a good big’un will always beat a good littl’un. They also say that the bigger they are, the harder they fall. Might prove to be an interesting contest, going forward.

Both the Muppet in Chief, Jean-Claude Juncker, and Wolfgang Schaeuble, the German Minister of Finance, are ruling out any haircut on Greek debt. Jeroen Dijsselbloem, the Dutch Finance Minister, suggests it’s too early to opine on the subject but suggests that support for a renegotiation of Greece’s debt position within the Eurogroup is weak.

In all, the time for strong language hasn’t come yet. Dijsselbloem flies to Athens today to meet his new Greek counterpart. Let’s wait and see. Nothing is ever eaten quite as hot as it is cooked.

Snow… getting around it

Meanwhile, the big snow beckons on the East Coast of the US. We’ve all heard of cancelled flights, closed subways and the ban on the use of private cars in New York. As millions stay at home, the big beneficiary will surely be Netflix which can surely expect record subscriptions over the next 48 hours.


But there is another, much more interesting effect. US economic data has broadly disappointed of late. Last Thursday’s jobless claims were higher than forecast, Consumer Confidence is down and the regional Feds’ reports on manufacturing activity have failed to live up to expectations. Monday saw the Dallas Fed report a fall to -4.4 in this diffusion index, well below the forecast of a reading of +3.

Although there is consensus – whether more due to fear of being accused of being a spoil-sport or not is still a moot point – the US economy is on fire, there are some indicators which point to not all being well in the garden. And then comes the big snow. Not only does it come, it conveniently comes at the end of January which means that the aftereffects will drag into early February. You don’t get the message? When January and February figures are reported in all manner of fields, they will appear with the foot-note that the heavy snow will have caused distortions and extraordinary effects. That, as noted, can now be used to dismiss anything unpleasant for the first two months of the year and will also be seen to have had a cooling effect on Q1 GDP. Thus, the growth story could, if necessary, be seen to have been in suspended animation rather than on the wane.

I strongly believe that a cyclical slow-down is perfectly possible and having seen the after-effects of Alan Greenspan’s 2001 defiance of the cycle, I strongly hope that nobody feels tempted to stand in its way again. There is not much the Fed can do from here – monetary policy is still about as loose as it can be – other than to keep rates on hold.

On that basis, I reiterate my current opinion that we will not see any tightening in 2015. The big snow might just give the Fed the Get Out Of Jail Free card it needs as it weighs up the “extraordinary circumstances” created by the weather. If the cold persists, it has an excuse. If the snow falls in the forecast quantities but then melts in a hurry, causing flooding on the Eastern seaboard including the environs of Boston and New York, there will be more excuses. Do not underestimate the FOMC’s ability to create the picture of the economy which suits its intentions rather than the other way around, if it so chooses.

A swan song in Moscow?

Looking the opposite way, S&P downgrade of Russia, though not entirely unexpected, came earlier than had been discounted and markets on Russian debt open weaker, yet again. Five-year sovereign CDS is quoted this morning at 600/610, 20bp wider than at yesterday’s close.

The benchmark Russian sovereign bond, the 7½% 27-Jan-2030 is weaker though, for those with a memory, far from tanking. Notionally issued at 100.00 with 2.25% coupon in exchange for Prins and Ians in January 2000, it could be bought in the low 40s for a yield of close to 20%. The coupon stepped up twice to the current 7½% and although the low yield, 2.57%, was seen in late 2012 before the political situation began to deteriorate, seeing the bonds close to par again is deeply unpleasant but far from catastrophic.

There is, nevertheless, a development which has me really concerned. Last night it was reported that Vladimir “Put-me-in” Putin is now claiming that there are NATO forces at work in the disputed regions of the Ukraine. Historians know that, in the event of war, the first victim is the truth but to hear such flagrantly inflammatory rhetoric from the Russian leadership is deeply worrying. It sounds to me as though the man is willing NATO to intervene.

There is still quite a powerful residual neo-con lobby in Washington which is pushing Germany and the rest of Europe into a conflict with Russia that it doesn’t really want. As Achim Duebel of Finpolconsult in Berlin is quick to point out, the Germans have a deep collective memory of fighting the Russians to their very costly detriment. Sell-side economists seem intent of harping on and on about the German’s collective memory and fear of inflation which I, knowing Germany quite well, think is complete poppycock but there are still plenty alive who saw action in Russia and who have no desire to see the boys go there again.

The Russian downgrade means nothing outside of the investment management community and I doubt there are many main-stream institutions with any exposure left. The political situation, however, continues to deteriorate. I do not like that at all. Black swan rising?

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