Friday, 21 September 2018

On the Nikkei, the euro and a Merkel-Cameron "walk in the woods"

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I was rather taken aback by a conversation I was told about which had taken place between a stock broker and his client. The latter tells me how the broker, full of enthusiasm declared “You must be in Japan!”. “Right,” answers the client, “what should I be buying?”… “Oh,” came the reply, “We’ll have to see about that…”

Anthony Peters, SwissInvest Strategist

If that doesn’t reflect in a few words the ways of the world, what does?

Of course you’d have made a fortune if you’d have bought the living daylights out of Nikkei futures in October. In fact, believe it or not, you’d make an absolute fortune out of buying everything and anything just before it went up and you’ll do even better if you sell it again just before it starts going down again.

Tongue in cheek, I’ve been spinning that old one to fresh faced graduates for longer than I can remember. I wonder if the same broker would have come into the office on Friday morning and, having seen the 88,000 instead of the consensus forecast 190,000 reported for the increase in the US Non-Farm Payroll and have cried “Buy America!” Would you? Would I? But that call alone would have also made 2½% in four days without losing 3½% on the currency.

I raised the point a few days ago and I shall raise it again. Adjusted for currency (and I’m talking dollars), the Nikkei and the Dow are still more or less flat to each other, year to date, with the Dow having risen 12.95% as at last night’s close and the Nikkei, currency adjusted, by 13.39%. Net of hedging costs, being long the soaring Japanese equity market will, at best, have broken even. Maybe I should add that of the 30.34% which the Nikkei has risen this year in Yen terms, 1.96% were put on today so on Tuesday closing figures alone, the US actually still has its nose in front.

I have been fairly parsimonious in making market calls in the recent past – I struggle just as much as the next man to make sense of a world where debt is bad but more debt is good – but I certainly can take comfort in having called the dollar correctly.

Angie and Dave in Meseberg

Meanwhile, the discussion as to the efficacy of QE continues even though the Eurozone doesn’t call it that and also sprays it through a different size of hoses and nozzles to the rest. Olli Rehn, the European Commissioner for Economic and Monetary Affairs has been busily defending the actions of member states in light of increasing criticism that they had taken – as many feared – their foot off the gas on the back of St.Mario’s “whatever it takes” promise.

Could this possibly lead to another epoch making “walk in the woods” in which this time the fundamental power axis within Europe is re-calibrated?

Although Rehn concedes that not enough progress is being made in the reform space, he does point that most are moving in the right direction - too slowly maybe but at least they are moving. Nevertheless, he has broken the last taboo now and has expressly named France as a laggard. Whatever residual vestiges there may have been of the key alliance within the European Union, the one between Berlin and Paris, it now finally looks to be floating, belly-up, down the Rhine.

The stinging criticism of Germany hasn’t died down and now George Soros has added his voice to those who suggest that the salvation of the euro lies in Germany’s exit. No surprise than that “Call me Dave” is lining up Mutti Merkel as a new best friend. Having done all that she reasonably can without beggaring her people in order to keep the slightly soiled dream of a grand currency union alive, she now finds herself reviled by those who reckon she could have and should have done so much more to dig them out of holes of their own making. Oh yes, it is so easy to take the moral high ground when someone else is paying and to blame the maker of the digging machinery rather than the land owner.

All of a sudden, the centre-right Cameron has rediscovered the centre-right Merkel and, it would appear, visa versa. Merkel has invited the entire Cameron family, wife, kids, the works over to her weekend retreat at Meseberg. Could this possibly lead to another epoch making “walk in the woods” in which this time the fundamental power axis within Europe is re-calibrated? Merkel has to face the electorate in September and Cameron is facing an up-hill battle even with two whole years before he has to face his own electorate. Could it really be?

Political pundits should be doing what equity buyers are doing and taking a currency hedged punt of what might be ahead of us.

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