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Saturday, 16 December 2017

On the ire of the Irish issue

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Anthony Peters speaks his mind about Wednesday’s 7-year sovereign deal.

Je suis Charlie. Nous sommes tous Charlie.

There is little for me to add other than to express my deepest sympathies to the families of the journalists and cartoonists who did not lose their lives in Paris yesterday but who had them ruthlessly and brutally taken away from them.

My sympathies go to the French people of all colours and creeds, but most of all to the concept of freedom of expression both in France and everywhere else in the world.

I am sure that I will not be the only scribbler who wheels out that great line attributed to Voltaire, “I disapprove of what you say, but I will defend to the death your right to say it,” but I will certainly be amongst the few who remembers that it was Heinrich Heine who fled from Germany to Paris in the early 19th century in order to enjoy the freedom gained in the Revolution – not only to think seditious thoughts, but to also write and print them with impunity – who wrote: “Where books are burnt, people will soon be burnt too”.

Just too big

That leads me to the €4bn 7-year bond issue for the Republic of Ireland which hit the market yesterday. It was an operative of one of the German banks which had been on the docket on one particular corporate issue last year of which I had been roundly critical – and who had indicated that my frank commentary might damage our on-going business relationship – who was first out of the blocks to ask what I might have to say about this particular deal. To be frank, I was disappointed.

Ireland has unquestionably been the best-of-breed in the aftermath of the sovereign debt crisis. Strictly speaking, Dublin’s woes were more part of the global financial crisis than the sovereign debt crisis as it got blown up by its banks’ and its citizens’ greed, rather than by budgetary indiscipline. Thus it had a far shorter, though no less arduous route, back to respectability. At mid-swaps +36bp it has very clearly arrived.

Funding requirements for the whole of 2015 are at €8bn but for some reason the Treasury either decided or was talked into taking half of that out of yesterday’s single 7-year issue. The book was healthy at €5.75bn but filling all and sundry in a total of €4bn was not a nice thing to do.

I was reminded of that disastrous Greek 5-year deal which marked the beginning of the end of Greece’s acceptability in bond markets and which by itself launched the collapse in confidence, leading us to where we are today. Not that I’m comparing Ireland with Greece, but it too over-filled what were blatantly puffed up orders and when investors, speculators and traders alike tried to unload their excess longs, there was no bid to be found. It would appear that the lead managers’ trading desks got flattened in the stampede of sellers. By the time the deal had priced and had broken syndicate, there were no more bids to be found.

I can remember only one occasion on which I was part of a botched new issue which had been mis-allocated and of which there were nothing but sellers for the first few days. It was a 10-year senior deal for Swiss Life and as lead salesman for Switzerland I was expected to be able to immediately – and at the full offer price – place into firm hands all those bonds which the head of syndicate’s hedge fund friends had speedily tossed back at us. If the deal had been so clever, my guys would have taken it down on the bid-side at issue, but it wasn’t so they didn’t.

The Ireland issue was not mispriced; it was just too large. The effects on the after-market were, nevertheless, the same and while syndicate garnered the fees, the guvvie traders were left holding the baby. In time, the deal will be fine.

Elsewhere…

Beyond Ireland, there was a deluge of new issuance on both sides of the pond as the volatility of the first three trading days of the year abated, and as planned early issues which had been held back were brought to market in what might prove to have been no more than a brief calm in the middle of a storm. Personally, I’m not too worried.

Whether the ECB announces QE on January 22nd or not – the eurozone’s dismal 0.2% December deflation (why not call a spade a spade?) might give St. Mario a bit more ammunition – does not detract from the general direction in which the economy, the currency and monetary policy are going. Likewise, the Fed’s urgency to tighten is also looking progressively less compelling.

So, as an investor things might not look too pretty but they don’t look all that ugly either, and as they are in-vestors and not out-vestors, better in than out. Before indices and benchmarks began to rule the world, the maxim was: “If in doubt, get out.” That has been superseded by “If in doubt, be index neutral.”

Meanwhile, this morning, Tesco delivered its sales Q3 sales figures which were pretty grim with like for like down 4.4%. The good news is that market estimates were for down 4.5% but that is scant comfort. Marks and Spencer also missed estimates as had Iceland and Sainsbury’s earlier in the week. Who sold all the pies?

Fact is that the UK’s spurt in growth has been consumer led and fact is also that the consumer has been flattered to deceive by random cash compensation pay-outs for PPI and anything else you care to mention. These are now tailing off sharply and with that consumption will surely decline. Is that going to mark the beginning of the end of the British recovery phenomenon?

The decline in oil revenues will also be affecting those Russians and Arabs at the top of the British consumption food-chain too. As little as many believe in the force of the “trickle down” effect, a small trickle is still better than no trickle at all. All eyes now on London real estate prices. Conventional gilts look cheap.

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At noon Paris time and 11:00am London time there will be minute’s silence held in remembrance of the victims of the Paris outrage. I invite you to join me in its respect.

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