Monday, 20 August 2018

The bears are in the driving seat, but the route has yet to be set

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Back from a healthy and restful four-day break which was notable by the fact that it also marked the introduction of a hose-pipe ban here in the South of England which was duly met by pretty much unbroken rainfall. While out there playing, it was hard not to take note of the two losing days on the US equity indices on the back of Friday’s disappointing labour report.

Anthony Peters, SwissInvest Strategist

Perhaps the most important point is that economies are never vectorial and that as much as one swallow a summer does not make, so one outlier in a series of economic releases a break in the trend does not make either. In fact, the markets seem to be far more attentive to the prospects – or lack thereof – of another round of quantitative easing on the part of the Federal Reserve.

Weak employment numbers should have equity geeks chomping at the bit as they hope for a continuation of the cheap money injections as the Fed will do all it can to prevent a reversal in fortunes for the resurgent economy. If you can’t quite follow the logic of that, welcome to the distillation of more than 30 years of market experience – nor can I.

However, there are far more worrying developments for the West taking place in the global economic interplay, not least of all to be found in China’s trade figures which were released this morning. Both exports and imports for March were down sharply but these followed something of a statistical aberration in both the January and February figures – the former dropping sharply and the latter equally spiking up but overall trade in both directions is trending lower.

These are not exactly happy times for either the Chinese or for the West which is still sort of hoping that BRIC demand will help to lift it out of the economic waste land which it has been erring around in for nearly half a decade. The rise in Chinese March CPI which was reported on Thursday at 3.6% is also not compelling – slowing growth and rising inflation are about as toxic a mix as one can find and one which always gives all central bankers the heebie-jeebies.

The slight fall in PPI could owe as much to a slackening in commodity input prices as to anything else but seeing as the overall cost-push seems to be coming from continually rising labour rates, I would not expect lower PPI to positively affect CPI in any meaningful way. Money supply numbers will be of the essence and they are due any day this week.

Spain’s cause for concern

Meanwhile, Spain is still the subject for the new trimester here in Europe. It remains a very different animal than Greece and probably has more in common with Ireland than with any other European economy. At 61%, debt to GDP is pretty benign, especially in an environment of plunging GDP.

However, the cause for concern is in the huge build-up of private debt which has generated a shortfall in domestic savings which in turn has left the government unusually dependent on external funding. Although the banking crisis is not as “in-yer-face” as it was in Ireland, it is in the banks’ balance sheets that the Spanish debt crisis is lodged.

According to the Fotocasa index, residential real estate prices are now 30% below their 2007 peak and, quite evidently, still showing no sign of stabilising. Government pressure on the banks in question remains high to cut the positions and to clean up the asset books but it is hard to find buyers for assets which are still falling in value and where the discounts required to attract investors into buying the gato in the bolsa would need to be substantial.

Adding to the problems are the debt levels at regional and municipal level. The boom in construction was met by competitive expenditure on infrastructure – “Build here, we have the best roads, communications…..etc, etc….” If high levels of existing infrastructure generate growth, then the country should be set fair to attract capital, jobs and people. Ummmm?

The money is spent but the tax-paying users are conspicuous by their absence. Spain is a moving target. The newly enhanced eurozone bailout funds should be strong enough to prop up Spain, should it need help – which no doubt it will do – and so on paper all is fine.

However, committing funds is one thing – raising them is quite another and although the EFSF is currently borrowing with ease, there are no guarantees that that will always be the case. We have seen different. The bears may currently be in the driving seat but they don’t seem to agree on the route to take. Caution is still a watchword.                          

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