Tuesday, 25 September 2018

On Spanish belief, Irish grief and the short-covering rally

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The ferocity of the asset price rally on Wednesday must have caught many a player off-side. After the post NFP plunge on Friday which, in its own way, was based on real economic figures, the Wednesday bungee jump came rather out of nowhere.

Anthony Peters, SwissInvest Strategist

The meeting of the central council of the ECB certainly didn’t add anything to the overall pool of knowledge but it was perhaps its reticence which above all capped the negative sentiment and set the scene for the mother and father of all rallies.

Nothing has been resolved but if there is still truth in the old adage that one should buy the rumour and sell the fact, then the rumours about how the Spanish banking recap is supposed to take place will certainly have been enough.

Just the risk of things going right was sufficient to spark a short-covering rally of significant proportions.

The idea of the EFSF ponying up the supposed €40bn of cash directly, rather than it being recycled through the Spanish government has all sorts of tangible benefits, not least of all that it avoids becoming a bail-out for the sovereign credit, to be sure. But on the other hand, it is another potential case of the collective being invited to assume the problems of the individual.

Why, the Irish would and should be asking themselves, did their country have to find itself pushed off the end of the high diving board on the back of its property bubble while Spain the Spanish people expect to be saved from the same fate of rigorous austerity?

Having just voted in favour of the fiscal compact, the Irish will have plenty of reasons to feel deeply betrayed by their Eurozone partners if Spain is to receive special treatment. When Ireland desperately needed higher interest rates during the period when it appeared – to the Irish at least – as though the property merry-go-round would never stop, it was laughed off the court as too small and too insignificant to warrant the ECB taking account of its specific needs. Revisionists now blame the Central Bank of Ireland for having missed the opportunity to tighten reserve requirements during the boom and hence for having permitted irresponsible lending and therefore the property market to go into hyper-drive. The Irish have donned the hair shirt and the cilice and might now be asking themselves “Why?”

The Spanish government has made no secret of the fact that it does not want to bring out the begging bowl for it has no appetite for the rigorous and austerulous constraints which accepting a bail-out brings with it. If it can convince the eurozone partners to bend the rules enough in order to permit the EFSF to fund the banks directly, then Madrid is sitting pretty.

Ah, Mutti

However, once again Mutti Merkel is threatening to spoil the party. Dis-intermediating rescue packages is not a good idea, as far as she is concerned. Remaining adamant that not only is Germany not the entire Eurozone’s cash-point, she also wants to assure that individual countries don’t get the feeling that they can lean on the collective with impunity either.

This approach leaves Europe with something of a Gordian knot. On one hand the solution to the current crisis is to be found in creating that ever closer union but, on the other, Merkel is trying to square the circle by refusing to permit individual nations to lower the standards of individual responsibility.

There is something of the Hell’s Angels in this, as only proven individualists are permitted to be members of the gang. The direct recapitalisation of the Spanish banks is, however, far from being a done deal and with the Greek elections looming on June 17th, there is still plenty of room for things to go wrong again.

Nevertheless, just the risk of things going right was sufficient to spark a short-covering rally of significant proportions. Old lags will know that turning a short-covering rally, irrespective of how powerful, into a self-sustaining bull market is, in the words of Lanfranco Dettori “an entirely different kettle of ’orse”.

Meanwhile, I learn that the NASDAQ is setting aside $40 million to compensate institutional investors for the confusion which reigned when trading began in Facebook stock. I can’t imagine what difference that is going to make to one of the most painfully mismanaged IPO’s in a generation. Since the float, the market cap of FB has fallen by some $30bn and still, at just under $64bn and to my untrained eye, the metrics still don’t stack up. Perhaps it’s because I lack that crucial CFA certificate.

Perhaps that’s why I didn’t quite “get” yesterday’s rally either.

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