In 1944, June 7 marked D-Day plus 1; in 2017 it is D-Day minus 1.
Tomorrow the UK will go off to the polls having been told, as we are at every general election, that this is the most important election in a generation. The fighting on the beaches might be quite vicious but in reality all parties are scrapping with one hand tied behind their back because the road to March 30 2019, Brexit day, still has to be marked out, planned and built.
FOCUS
Predictions for the outcome now range anywhere from a hung parliament to Theresa May sailing home with a 60-seat majority. Personally, I have never felt less certain as to who will win as once again the outcome will depend to a significant extent on the behaviour of the angry young. The level of debate in the public sphere has been singularly poor and the sense that the country is being led by tired old people with tired old ideas refuses to go away. I suppose even the Green Party remains true to its principles by steadfastly using recycled policies.
I have been involved in endless discussions from the meeting rooms of the City to the pubs of the Cotswolds in which the economic implication of the election outcome and then Brexit are concerned. It has been during these that I have decided that the best way to gauge a risk is to study the options for hedging against it. It becomes a little bit like an Edward de Bono-inspired exercise in lateral thinking.
Although de Bono and many of his more outlandish thoughts are derided today, it is interesting to note that he developed ideas involving the use of crypto currencies long before the likes of Bitcoin had been thought of. I digress.
MAVERICK
There are clearly no signs of aggressive selling of UK risk although most of the gains that sterling enjoyed against the euro in April and May have been handed back. That said, against the greenback, at US$1.29, it is not far from its recent highs, which in turn are the highest since October of last year. The media love to report on pound/dollar even though that particular parity probably says more about the US than it does about Britain. The broader and therefore more representative trade-weighted sterling index, however, stands at 97.375 at the time of writing, which is slightly above the post-referendum average of 97.20. So sterling is in the middle of the range. 10-year Gilt yields at below 1.00%, their lowest since October and the FTSE 100 just 20-odd points below its all-time high of 7,547.63 on Friday also give nothing away. Markets seem incredibly, and to some extent worryingly, sanguine. Once again the new rule seems to apply that long is the new neutral.
Back in the real world, there are more pressing issues to be dealt with, not least the ongoing problems in the EONIA market. For those unacquainted with EONIA and its sterling equivalent SONIA, it is a “dematerialised” overnight lending rate that is calculated from the average of all reported transactions rather than based on the submissions to a fixing panel as do Libor and Euribor. The benefit is that it reflects actual market transactions, but the downside is that it can only be applied post-factum - it is not until the rates on all market transactions have been collected that it can be set. Another disadvantage is that it can be subject to the vagaries of underlying market liquidity and hence activity as opposed to Libor, which is not exposed in that way and can be controlled by cool heads. The arguments are still raging as to whether the Bank of England acted correctly when it raised an eyebrow during the panic in the money markets during the darkest days of 2008 and only those who believe in both the perfect market and the existence of a perpetuum mobile would fault the Old Lady.
Thus it has been that although EONIA has been fairly stable in the past months somewhere in the -35bp to -36bp corridor, it has swung wildly in the last could of days between -33bp and -37.3bp as at last night. The authorities’ obsession with replacing one flawed system of market choosing with another flawed system of their choosing inspires little confidence. That all systems will show cracks in times of stress is pretty obvious and replacing one with another will only and at best swap around the areas that stress fractures will appear, which does not make it inherently wrong. Legislators tend to forget that markets are not abstract structures but are in fact nothing more than the sum of the people, with all their human frailties, who act within the market place. The market and the market place should not be confused with one another.
POPULAR
Failing Banco Popular is to be subsumed by Banco Santander, the poster child of post-crisis European banking. As at close of business, Popular’s market cap was a mere €1.3bn although Santander has only paid a token €1 for the dying bank and has advised that it will need to raise some €7bn to finance the transaction. That gives a little insight into how profound the problems on Popular’s balance sheet really are.
What negotiations went on behind the scenes will of course not be known for a long time, if ever, but I trust that they will have included an amnesty for Santander for any misdemeanours that Popular might have committed and which might still come out. The likes of Bank of America, encouraged to be patriotic and to rescue Countrywide, and Lloyds, which mopped up the HBOS mess at the behest of the authorities know to their own cost – and that of their shareholders – that no kindness goes unpunished.
I have the highest regard for Santander chairwoman Ana Botin and would like to remind that she is the daughter of the previous chairman. Corporate governance rules and the obsession with imported chairmen can hold good but needn’t. HSBC, for so long run by home-grown talent is now, under huge pressure, bringing in an outsider to chair the bank. Ana Botin took over on his death from her father, Emilio, who in turn had succeeded his father as president of Banco Santander. As far as I can tell, the succession of Botins has done the bank no harm at all. Ana has three sons. I wonder whether the next chairman might be among them and if so what those mealy-mouthed corporate governance nerds will have to say about it?