Saturday, 26 May 2018

The Big Sleep

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This week brought the Dutch elections and the Federal Reserve’s third 25bp tightening move in a little over a year. Outcome: two big yawns. 

Please don’t get me wrong; I’m not trying to suggest that either event was insignificant but it would be hard to argue that either should have been unexpected or that markets had any reason not to have them fully priced in. And for once, believe it or not, they did. There even seemed to be a little bit of old-fashioned “buy the rumour, sell the fact” going on but beyond that nothing appears to have fundamentally changed in markets. 

Janet Yellen’s rather dovish tone has given both risk assets and the so-called “risk free” a spring in their respective steps but the sense that the great Trump rally might slowly be running out of steam as the cold light of day begins to dawn on some of the exciting election promises won’t go away. Going back six months to just before the election, the Dow has only 11 stocks that have advanced against 19 which have declined. Likewise, the ratio on the S&P 500 is 191/306. This does not point to what might be taken to a broad-based rally but possibly more a jolly good punt on individual stocks, which would be expected to benefit from Trump’s multi-coloured rhetoric. 

And yet, with only 191 of 497 S&P stocks higher on a six-month horizon, the index has rallied 11.32% and the Dow, with a mere 11 of the 30 components in the green zone, is 15.51% higher than it was six months back. I might be wrong but to me there seems to be something slightly asymmetrical showing up. A number of observers pointed out quite bluntly yesterday morning that an equity market that rises on a Fed rate hike must be, my words, smoking something which isn’t necessarily tobacco.

Perhaps, with the recent obsession with the Netherlands and the Fed, markets have forgotten to see the forest for the trees. My little spies stateside tell me that Republican enthusiasm for its triple lock on the House, the Senate and the White House is waning as the differences between old-school Republicans and the Tea Party-leaning faction begin to crystallise as fears also grow that valuable legislative time will be lost chopping and changing the Affordable Care Act – Obamacare to the rest of the world – while the great infrastructure spend that initially launched the stock rally is pushed to the side lines. Somewhere there is quite probably a ticking time bomb; we just know neither how big it is nor when it might go off. 



Meanwhile, Mutti Merkel has put the East Coast blizzard that caused delay to her visit to Washington behind her and is off to see the Donald today. I think we all have a pretty good idea what the main subjects are going to be. The Donald will be charming, Merkel will play the loyal but concerned ally and, once the photos have been taken and the smiles unpinned and put back in the box marked “Political Expediency” , the two will part with no greater understanding of what the other one in thinking and why. The president continues to thrash about, his latest target being the UK’s surveillance agency, GCHQ, which he now accuses of being in league with the Obama White House in tapping, hacking, eavesdropping or whatever else it might be called his Trump Tower lair. Added to Turkish President Erdogan’s fight with the Dutch, does anyone else see parallels to the Reichstag fire of 1933? 

Back in the real world, the Bank of England’s MPC met yesterday and although monetary policy was left unchanged, as opposed to the Fed which was unexpectedly dovish on Wednesday, the MPC was in equal measure hawkish. Kristin Forbes’ dissenting vote in favour of early tightening does not reflect the risk of a shift in policy but it does remind us that there must be a lively debate going on within the MPC as to what lies ahead for the UK economy. I’m not sure whether reading the economy has become more difficult because there are more moving parts than there were or whether the micro-analysis of everything and anything that moves has turned a well-adjusted 100-piece symphony orchestra into a 1,000-piece cacophony producing mainly white noise. 

Thus, at the end of what could have been a benchmark week we know not a lot more than we did at the beginning. The Fed and the BoE have confused us, the Dutch elections have only confirmed what we should have known all along, and the Trump administration bats on with little or no regard for anybody else, which finally brings be to Theresa May and Nicola Sturgeon.



The latter’s kick in the former’s shins by announcing her desire to push for a swift repeat of the Scottish independence vote prompted me to write the following to one of the national newspapers: “I trust that Ms. Sturgeon, while continuing to reject the notion that the EU referendum was voted on and decided by the United Kingdom electorate as a whole, that she will, should she get her second bite at the cherry, be consistent by permitting any part of Scotland which might not vote for independence to remain within the union and, quite logically, become part of England.” 

The prime minister was slightly more direct by suggesting that it would be impossible for the Scots to vote before the final terms of Brexit and the relationship between the UK and the rest of the EU had been signed, sealed and delivered. That, I think is final and “Scexit” can be confined to the bottom drawer, irrespective of what noises come out of Holyrood. 

It was interesting to read that Ewald Nowotny, the president of the Austrian central bank, has suggested that front-end rates could be raised before QE is ended. I was recently asked why I had suggested a few weeks back that the back end of the curve might be safe place to be. Mr Nowotny has just supplied the answer. 

Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. I flew back from Milan to London yesterday – in the process of which I lost my briefcase containing both MacBook and iPad – ouch! – and in doing so I flew across the Alps in glorious, sunny conditions. Unless something changes dramatically, I’d humbly suggest that those who are planning a skiing holiday over Easter pack their hiking boots and ubiquitous red socks along with their ski boots. Mind you, as with everything else at the moment, it might look very different in a week’s time … although on recent form it looks unlikely.

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