A Tuesday that feels like a Monday and only four days until Friday; there’s nothing wrong with that. The world was, nevertheless, not entirely asleep and we return to a world that is still struggling to know which side is up.
Puerto Rico has defaulted. The RBA has eased rates by 25bp. HSBC has delivered - not a lot but it has delivered. UBS has not done that. BNP Paribas definitely has.
It was interesting to hear UBS CEO Sergio Ermotti blame the risk aversion of the bank’s clients for its poor performance – net earnings were down 64% on the same period of last year – at the same time as St Mario was blaming the Germans and their propensity to save for the slow recovery of the global economy. The Germans have spent the past 70 years being blamed for more or less everything but pinning the lack of GDP growth in the Amazon Basin on the lack of the flapping of €100 notes in Hans and Helga’s wallets seems a tad harsh.
Saving Germany
I get the ECB president’s thinking. As people save and don’t consume, an ever-increasing pot of savings is looking for a home in an environment of ever-decreasing investment demand which makes sense because nobody is consuming and therefore increased production capacity is not high on companies’ boards’ to-do list. On the other hand, it is not all that difficult for a man with a life in public service, intersected with a spell as an MD at Goldman Sachs with the concomitant copper-bottomed and inflation-proofed pension rights, to point at those who can see no return on their investments - and who keep on being told how much longer they will live than previous generations - strive to reinforce their nest eggs.
I wonder who thought that Hans would make a calculation along the lines of “I’m getting sod all returns on my capital so I shall respond by spending my cash on a new dishwasher at 0% credit interest, which means nothing to me anyhow because I’m paying cash…..”?
On the same note, can Mr. Ermotti really be surprised that volumes have declined? Why would any rational human being want to pay transaction fees when rates are already negative? Isn’t that enough? For those for whom checking the Swiss sovereign yield curve is not daily meat and drink, it might come as a surprise that yields are negative the entire way up to 15 years and even the longest bond on the curve, the 2% 25-June-2064, yields no more than 32bp. That’s not even a third of one percent. Ermotti complains of clients’ “risk aversion”. Personally, I’d call that common sense. In Ermotti’s defence, though, he did remark that the regulatory environment doesn’t help. As my chum Bill Blain at Mint Partners would have it, this was a “NSS” (No shit, Sherlock) moment.
Clients’ risk aversion looks like it might become the catchphrase of the week, if not the month, as European banks report earnings.
Macro
Back in the macro world, the Markit/Caixin China manufacturing PMI for April dropped to 49.4 from 49.7, comfortably missing the forecast of 49.8. This takes it further away from the official PMI figure of 50.1 – still only marginally expansionary – which was released yesterday. In keeping with current market rationale – or total lack thereof – the Shanghai index rallied to close up 1.87% and the Shenzhen by 2.95%.
Keep an eye on oil – not a new recommendation – as WTI is now settling around US$45 per barrel and Brent around US$46/bbl. I know how some writers get obsessed with percentages so please take on board that this marks a 66% increase in the price of crude since the lows of January. Where’s the headless chicken dance? No need. The last time we were paying this kind of price for oil was in November of 2015 which is just about six months ago. At that point, the Dow was near as dammit exactly where it is now and the S&P was less that 1.5% higher.
I continue to sense a lack of joined-up thinking in the investor community which is, given the equal lack of harmony between the political class and the monetary authorities, not all that surprising. Thus it is that the ECB’s rather outspoken Sabine Lautenschläger said “it seems very odd that politicians are now criticizing the ECB…”. She added that she would not say that the ECB had fired off all its ammunition but there is little doubt that the central bank does not want to leave itself with no wriggle room at all.
And while on the subject of politicians, whither Greece? Talks are progressing with a snail-like pace but nobody, absolutely nobody, is letting the words “irreconcilable differences” enter the vocabulary. Meanwhile, I suppose the Governor of Puerto Rico would love to be called Stavros. Puerto Rico’s major creditors have agreed to a 30-day stand-still while a solution is sought after the US dependency declared a moratorium on US$370 million which was past due yesterday.
As painful as it may still prove to be, maybe the eurozone should have done to Greece what the US Government is apparently doing to Puerto Rico; cut it lose and start again…