Friday, 22 June 2018

On rabbits, snails and an Aussie squid

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  • Peters 475px June 2014

Anthony Peters sees fear, loathing and lethargy in the market ecosystem.

Talk about a rabbit in the headlights! Bond markets might as well have remained closed on Monday for all the desire investors and traders alike showed for getting involved ahead of Thursday’s FOMC caucus.

Although there seems to be something like a 70%/30% consensus crystallising against this week bringing that first tightening move – I’m firmly part of the 30% – the 70% do not appear to hold their view with any particular conviction.

Anyhow, the upshot was a quiet market with little by way of new issuance and whatever did show up did not find too much following. The most telling event on the day here in Europe was a three tranche deal for the French pharma group Sanofi which would normally have queues around the block but which struggled to raise a subscription book of €3bn for €2bn of bonds.

Even more telling was a bread-and-butter €500m 3-year deal for Banco Populare which was forced to run with just 450 million in subscriptions (how many of the 450 were underwritten by Smoke and Mirrors Securities is anybody’s guess) but the deal was priced at mid-swaps +255 and closed at +267; not a fiasco by any stretch but not great. Trying to bring a high-yield financial into that market displayed either ignorance on the part of the borrower, insensitivity on the part of the lead managers or, most probably, a little bit of both.

Old bond market hounds have long wondered how syndicate desks will deal with a world where investors are no longer ripping anything with a coupon out of their hands – we out here occasionally now refer to them as allocators rather than as syndicators – and every time something like this occurs, which it does from time to time, we hope that things are about to change and that the buy side might regain some power in the pricing process. So far no luck. That said, the next three days will most probably belong to investors rather than issuers.

On Japan and snails

Ahead of the Fed, the Bank of Japan had its policy setting meeting today and not a lot it had to add to what we already know. QE will rumble on, inflation targets will be maintained and the most inscrutable face presented. Watching the BoJ reminds me a bit of waiting for a snail to do the 100 metres in 9.9 seconds. If it doesn’t happen, there’s no sense in changing the snail and not much more sense in lowering the time target to 10.5 seconds. The BoJ must at some point adjust its terms of reference.

It refrained from adding further stimulus but seeing as that all the free cash in the world (or most of it, at least) has not got the ship moving yet, why should anybody be surprised. Instead, Kuroda-San and his merry men expressed the view that a resumption of growth – Q2 saw economic contraction – would bring back inflation. With oil trading in the mid-US$40s pbb? Who are they trying to fool, other than maybe themselves? Raising indebtedness without the chance of being bailed out by some serious – and I mean serious – inflation is a toxic mix and one which nobody of sound mind should consider visiting upon the next generation.

Alas, these are not subjects we like to discuss and thus we take heart from the BoJ’s optimism, like the idea of no extra stimulus at this point in time and settle back down into our highly courageous “Japan, slightly overweight” or “Japan, slightly underweight” tactical asset allocation.

Squid politics in Oz

Meanwhile, down under, the national sport of felling incumbent prime ministers has seen another bull’s eye scored. I did briefly think about using the pun “Turnbull’s Eye” but that seemed sooo tacky, I decided not to. The outgoing PM Tony Abbott will, by all accounts, not be missed although Malcolm Turnbull is anything other than uncontroversial in his own rights. He did not get ousted himself as leader of the Liberals by Tony Abbott in 2009 just by chance. He was, if my memory serves me correctly, brought down by his flirting with the then-Labour government over emissions trading. Australia’s poor record on the environment needs in some way to be addressed and Abbott clearly refused to do so, if only on principal.

“The Australian” wrote this morning “Industry bodies welcomed the arrival of a PM with a track record in business and warmed to the idea that the former investment banker can succeed where Tony Abbott failed, using a more collegiate and co-operative style of government to push through economic reforms.”

On the other hand, my new colleague here at SwissInvest, Andrew Stuart, noted yesterday “Incidentally, Malcolm Turnbull is ex GS partner. The squid strikes again”. Funny that, isn’t it? At least, if nothing else, he and Britain’s new Labour leader Jeremy Corbyn share their republicanism. I’d love to be a fly on the wall when the two of them meet, if ever they do.

There we are; Monday was largely a non-event and I’d expect today, Tuesday, not to much better. Anyone for a long lunch?

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