Monday, 16 July 2018

On rising assets and covering yours

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Anthony Peters looks at what’s moving markets, the slump in China, and Cameron’s tax promise.

Anyone who thinks that, following yesterday’s inconsistent price action in risk markets, we might know more today about the possible outcome of the Greece situation than we did yesterday either knows something nobody else does or has been smoking something which might get him into trouble with the boys in blue.

The Greeks tell us that an agreement is within reach but Wolfgang Schaeuble, the German Minister of Finance and the guy with his finger on the “Go” button, told German TV news last night that he was “surprised” by such reports and that negotiations “still haven’t come very far”. Whom do we believe?

I suppose rising asset prices – some think we’re looking at a bubble formation, some don’t – might well motivate investors to take a Panglossian approach and readily justify themselves by simply buying more. I can only repeat the observation that a money manager gets more stick for being short or underweight when the market continues to rise than being wiped out along with the crowd if, as and when the rally breaks down.

Despite the headline chasing, the market was more spongy than it was up and down. That did not prevent the tech-heavy NASDAQ index from coming close to making a new high. Even Apple Inc, which has struggled since February, is within US$1.00 of the all-time high it made in February.

Perhaps the lack of new data – the US only had weekly mortgage applications on the slate – had markets forget the deluge of releases on Tuesday which might well have pushed the FOMC closer to making that first move rather than further away.

Given the uncertainties on both the Fed policy front and on the outcome of Greece, one would have expected some defensive moves but in the current environment long appears to be the new neutral.

Perhaps the greatest beneficiary of the gay abandon with which risk is being treated was the City of Chicago which raised US$674m in the US municipal bond market just days after it was downgraded to junk status by Moody’s. There had been all kinds of fears that investors would pot it up with the likes of Detroit but in the event there was a book of over US$6 bn in orders and the deal priced comfortably through guidance.

Financially, Chicago is in deep doo-doo with a massively underfunded pension scheme but nobody seems to care. Perhaps the Americans are looking at Greece and weighing up the chances that the powers that be would ever permit it to default.

Chinese check-out

While Europe and the US went to bed in party mode, China has woken up with the hang-over. The PBOC began to drain liquidity by way of reverse repos and stock markets have gone into free-fall. This is not what most had expected. The central bank was supposed to, or so markets assumed, continue easing in order to prop up the economy. I had questioned that when suggesting that if monetary easing was only being implemented in order to support deeply indebted municipalities and the evident property bubble, it would do more harm than good.

This draining exercise is good news for opponents of the sort of excessive central bank action which distorts markets – which currently includes pretty much all major ones – beyond recognition by encouraging over-leveraging by retail investors. The effect has been immediate and the Shanghai Composite is, at time of writing, down by over 6½%. The Shenzhen Composite has lost 5½% and the Hang Seng is down by 2½%. Full marks to the PBOC; Federal Reserve, are you watching?

The sharp correction in China should not affect European markets as its silly stock market rally has largely been a local phenomenon so this correction should remain so too but one never can tell.

Election victory, by George…

In the UK yesterday, the new parliament was reopened with the Queen’s Speech – that’s Her Majesty reading a statement prepared by the government – in which the legislative programme has been set out. Unsurprisingly, the key piece will be the law on the EU in/out referendum.

It also includes the proposed law which bans the government from increasing income tax and VAT and National Insurance before the next election in five year’s time. I’m not sure why Dave “you may now call me David again” Cameron wants to paint himself and his Chancellor, George Osborne, into such a tight fiscal corner but we can but sit back and to see.

A propos, George Osborne; I have met and spoken to many Labour and Liberal voters since the elections and they seen to universally agree that it was Osborne and not Cameron who won the elections for the Tories. I couldn’t agree more.

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