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Tuesday, 24 October 2017

So much for a soft euro policy

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  • Anthony Peters columnist format

Best we don’t deceive ourselves. We are still in the silly season, albeit its dog-end. The Dow rebounded on what was the second lowest volume day since July 18 but in Europe there was something very different afoot where the Dax traded over 100m shares, up from a mere 35m on Monday and only the third time since July 21 that turnover has gone into nine digits. On that heavy volume the Dax fell 177.59 pts or 1.46%. At the same time the Bund future rallied just under a half a point, equally on massive volume, to close at 165.43, up from 164.96. 

The Bund chart for the year to date looks a bit like a picture of the Dolomites with yields spiking and falling back again as investors try to get their head around the realities of the eurozone economy, the politics and the mind games which the ECB is playing with them. Between June 26 and July 13 the yield on the 10-year Bund rose from 0.245% to 0.603%, only to find itself back at 0.342% as at last night’s close. If ever there has been a display of a market not having a clue what it is doing, where it is going and what fair value is, this is it.

The big, fat, wet squib which Jackson Hole was might in some way mark the inflection point in the belief that the central banks hold the answers to all questions and the key to all solutions. Economies are not made by central banks and even less by politicians. They are made by individuals getting up in the morning, spitting in their hands and creating wealth. Politicians, most of whom have never been part of the productive economy, only show interest in the economy in as a vehicle to re-election.

The shilly-shallying around the Brexit negotiations – on both sides – are a case in point. The Muppet in Chief, Jean-Claude Juncker, was back on the wires yesterday reaffirming that the UK would not be permitted to negotiate any trade deals until the divorce papers are signed.

I feel tempted to call Juncker a pocket Napoleon but that, I’m afraid, would be an unfair denigration of Napoleon. The comparison with Nicolas Maduro is perhaps closer when it comes to clinging on to orthodoxy to socio-political catechisms which have been overtaken by time and by events.

How can Juncker pound the EU rule book in light of more than half of the EU’s 28 members still failing to meet Maastricht criteria? I still recall some very strict fines being envisaged for transgressors and remember wondering at the time what good is done by imposing monetary fines on countries which have budgetary issues? I likened it back then to a frustrated mother smacking a screaming child while urging it to shut up.

If the solution to Brexit is the creation of a transitional structure, don’t we then end up with what the UK had originally sought, namely an economic tie to the rest of Europe without the political integration element? That the Eurocracy wants to avoid this is understandable. Had just a little over 1% of the British voters backed remain rather than leave, none of these questions would have had to be asked, but as once can’t put the poo back in the horse the course of history has been altered. Juncker could learn lessons from King Canute but he will surely valiantly resist.

What the five months since Article 50 was triggered have shown is that the existing rules don’t work. Would it not make more sense, rather than trying to squeeze the problems into an ill-fitting box, to try to build a new bespoke solution? Pigs’ll fly.

Sr Draghi has other problems on his plate. The euro finally broke above US$1.2000 in intraday trade yesterday which sort of makes a mockery of the ECB’s supposed soft euro policy. In fact 1.20 hadn’t been seen since January 1 2015. Tracking $/€ is interesting, although the dollar has a set of political issues which make it hard to value. £/€ is also tricky with all the white noise of Brexit so a good place to look is ¥/€. The yen has been the destination of much of the flight to quality trade over the North Korea issue – why anybody would buy the currency of the most directly endangered country in a flight to safety scramble escapes me – but even against this en vogue currency the euro is “en fuego”. As at the time of writing the ¥/€ is at ¥ 131.58, also a 20-month high.

With sterling having now dropped against the euro by a lot more in percentage terms than any trade tariff could be expected to be and eurozone business looking at a toughening global trade environment, losing simple access to the UK would spell another nail in a shrinking coffin. Suspicion has to be that the British people, wittingly or unwittingly, have grasped that the world is changing and that much of what governs the EU is still directed towards a 20th century ideal of an open Europe while the current issue is one of an open world.

Of course Theresa May cuts a lonely figure in Japan and although her hosts have been very polite, she doesn’t have very much to offer them in exchange for loyalty in the face of a hostile EU. They might agree with her that the EU is doing all it can to punish the British for leaving but sadly that doesn’t sell cars or pay the bills. No agreement being better than a bad agreement cuts no ice here.

As August draws towards a close, the route markets will take between now and year end has not yet been defined. Not wishing to live in the past, the events of 30 years ago are now ancient history although many are looking for a 1987-like crash during the autumn.

The choppy trading pattern of the summer is not entirely unlike 1987 but the world has changed beyond recognition. During the 1987 crash Ossie Gruebel is said to have wandered up and down the Credit Suisse trading floor instructing traders to buy anything panicking retail clients were selling. They did and a fortune was made by the bank during the rebound. Forget that happening again. Anyhow, retail can’t panic as most of it is bound in by strategic asset allocation models and they are wrapped in passive investment vehicles. Never has petty retail been further from the action and never have index strapped investment managers been less interested in market directions.

The autumn might turn out to be interesting but most probably not in the way in which most people think it will be.

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