Today is usually the longest day. Not this year, and not to Cornelius Ryan, for whom The Longest Day was June 6, 1944. Nor is it for the man in 10 Downing Street; his longest day will surely be June 23.
Brexit schmexit! I will remain brief today as nothing which involves economic fundamentals will have any effect on the way markets trade. The huge moves in sterling and in risk assets in general – most of the main European stock markets put on over 3% yesterday - confirmed the view that, when the vote has been counted by Friday morning, the British people will have chosen for this country to remain a member of the EU.
My own sense is that they might be right. Brexiteers might or might not be in the majority when it comes to committal views but the “don’t knows” will most probably, for choice, back the status quo. On that basis it is likely that the Remain camp will carry a majority of give or take 10%.
Looking at the sea of green on the screens yesterday, I was left wondering just what had happened to all the doomsday scenarios surrounding the global slowdown and threatening US recession that had everybody heading for the hills last week? I was right in part yesterday when I wrote “I suspect most of the action going into Thursday will be on the Remain side so it will be lifting some of the sterling hedges, selling bonds and gold and buying equities. It is very much the risk trade…” but I could not have been more wrong when I went on “….although I am sceptical that the pay-off, should it come good, will justify the risk taken”.
Risks
Spot gold has come off its 22-month high of US$1,302 along with most other defensive trades; the 10-Year Bund, having surreptitiously and only very marginally crept back into positive yield territory on Friday closed at positive 5.5bp in yield. Put in context, the bonds are, as at this morning’s opening, trading around 80 cents below their high price on Thursday. That equates to €8,000 per €1,000,000 of nominal holdings. The 0.5% coupon on the bonds, however, only throws off interest income of €5,000 per year. What part of buying these bonds can be deemed to be risk-free escapes me. Risk-free of the index-addicted portfolio manager maybe, but not in the slightest for the pensioners and retail investors who have just seen their annual income wiped out in two days.
I was mildly horrified yesterday morning when I heard a JPAM portfolio manager on CNBC’s Squawkbox Europe laud the 24% total return 10-year Bunds had offered up year-to-date. So what? There’s no sense loading the boat with today’s performance if all that is being done is to fill the portfolio with tomorrow’s landmines and time bombs. The ECB has clocked that and has been buying corporate bonds at a faster rate than forecast by the market. With the German ruling on the constitutionality of OMT due this week, it does not want to fall foul of yet another Bundesbank rule which prohibits it from buying assets which yield below the official money market rate.
Meanwhile, that arch altruist George Soros has warned that a British vote to leave will trigger a 15% collapse in the pound. I wonder how long he was yesterday when sterling rallied 3%, its biggest one day gain since the volatility of the 2008 crisis.
In the closing days of the campaign our European partners, other than the French, seem to have grasped that threatening the people of this sceptred isle (as Shakespeare so eloquently put it) with Armageddon was only pushing the voters away and suddenly it’s all charm offensive and hug a Brit. The tabloids are full of adverts to that effect.
I shall continue to sit on my hands; I have been long all the way down and am watching the market rebound with satisfaction though not with elation. Some of the froth of silliness is being blown off but the underlying issues of too much cheap money, questionable asset bubbles, dodgy banks and even dodgier politicians remain unchanged.
Before signing off, take a look at VW. There is to be an official investigation into the behaviour of the board under Martin Winterkorn, which apparently knew of the fraudulent emission figures well before they became public knowledge but failed to inform shareholders. Bad? How about the new guy in charge, Hans Dieter Poetsch, who has rejected calls for a special probe into the diesel scandal which is to be voted on by VW shareholders this week. He said: “We can’t orient ourselves only on public opinion to make it easier for us…. We need to find the best system for ourselves, not the most popular”. Erm? Are shareholders here for the benefit of the management or might it not, just perchance, be the other way around?