It’s time for the annual Black Friday malarkey, traditionally the big shopping day and generally acknowledged as the beginning of the Christmas period after Thanksgiving.
I am beginning to that it is not in fact a day but an entire week in which people across the world who probably didn’t even have a clue that yesterday was Thanksgiving get drawn into fighting with each other over bargains that in many cases aren’t even that.
Conventional wisdom has it that over a third of retail sales in the US will take place between today and Christmas and that therefore it is today that retailers see their P&Ls for the year begin to move from the red towards the black. Now we find authorities, especially in China, warning of online scams and reminding over-eager bargain hunters that what looks too good to be true most likely is.
Away from the hype there is some pretty hardcore economics being watched. The traditional retail sector has been under pressure from the online wizards such as Amazon. Amazon stock was trading around US$750 this time last year and last night it closed at US$1,156. Over the same period Macy’s stock has halved from just above US$40 to close last night at US$20.63. That record sales for today are forecast is not news. News would be, were it to happen, if the erosion in bricks and mortar retailers’ share of the bonanza were to stabilise.
The headline figures provided by the National Retail Foundation are impressive. It is forecasting today’s turnover to be in the region of US$682bn, an increase of 4% over last year’s numbers. The NRF itself points out that the best deals are normally not to be found on Black Friday itself but during the pre-Thanksgiving week, although that does not appear to lessen the annual hype.
Our trading floors were already pretty quiet yesterday. The Bund futures contract, still one of the best indicators of European market activity, struggled to scrape above 250,000 traded lots yesterday, barely a third of the volume of an average day. On that basis and in the knowledge that Wall Street will be in the hands of juniors who will have been sent in to switch the lights on and off again, today will be a great day for us to do a spot of online shopping too, comforted by the certainly that the bosses and the compliance officers will be at it too.
Shadow boxing
Meanwhile the volatility affecting Chinese asset markets has not abated. Beijing is chittering about tightening up on the shadow banking sector and once again the markets are running for cover. These official threats against the informal and unregulated lending space are nearly as ritual as Black Friday, although many investors know that in order to maintain intended growth figures central authorities will have to keep both eyes firmly shut. It’s only a few weeks since the party congress and undertaking anything that might lead economic performance to undershoot would not be welcomed by the central committee, irrespective of how much it might be needed.
China’s shadow banking sector probably provides the largest single explosive charge in the minefield of global market risks but it is also the one that is best flagged, thus being a known unknown, maybe even a known known, and one that doesn’t generate too much fear. The fear is what happens to GDP targets if the authorities really were to clamp down on the sector. When it comes to “damned if you do and damned if you don’t”, Beijing’s banking conundrum puts the wider impact of Western central banks’ monetary policy and balance sheet reduction problems in the shade.
Chinese domestic bond yields are still rising. This year has seen corporate bond yields increase by around 200bp to above 5.5% whereas the same borrowers can now raise funding in yield-hungry US dollar markets at half that rate. Corporate bond portfolios across the globe are now stuffed with short and medium maturities for issuers, the names of which the eager lenders had not heard this time last year. The problem lies not in the credits per se but in the putative liquidity mismatch in the event of crisis, should the Chinese banking system really find itself under government scrutiny. The blind belief that the Chinese credit bubble is too big to fail should have no part in investment strategy and anybody who denies that is conning either their investors or themselves, and in all probability both.
There also remains a significant mismatch between what we regard as transparent and the Chinese interpretation of the same concept. The “Beijing put”, the firm belief that the government will make sure that the worst cannot and will not happen might have some validity but it will never be generically applicable and understanding the difference between generic and idiosyncratic risks is pertinent. More to the point, it is easier to mentally merge the two in equity markets than in bond markets. The Greenspan put and the ECB put have never been applied to corporate bonds but I do get the sense that the Beijing put is.
Poll position
Back in Germany attempts to rescue a hopeless situation continue. It appears that my own interpretation of the options is in the process of being overhauled as President Steinmeier’s banging together of heads looks to have taken an unexpected turn. Rather than standing on the FDP’s toes as I thought he would he has turned to his own party, the SPD, and has asked them to ride to the rescue which, by all accounts, they are now considering. That would leave the AfD as the largest single opposition party, a situation I believe the SPD had wanted to avoid by remaining in opposition itself. In reality Mutti Merkel ought to find herself as damaged as did Theresa May, and in the domestic arena she might be just that, but her international standing will most probably be enhanced as foreigners contemplate what the world in general and the EU in particular would have looked like without her quiet but authoritative presence.
Although the formation of another black/red government is far from completed there is a clear sense that this particular goose is now as good as cooked. German asset markets should not react to these developments in as much as they hadn’t during the past weeks or months. It’s hard to rebound from a sell-off that has never taken place. The only real canary in that particular coal mine is the 10-year Germany/France spread. At 33.5bp it looks a tad tight and might drift a bit wider from here but apart from that there’s not much to add.
Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. The writing is on the wall and the script says “go Christmas shopping”. I have already gently begun although so far I’ve only purchased a present for the dog. I really must try harder.