Tuesday, 25 September 2018

Too low for zero

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Anthony Peters on negative yield, hypocrisy in France and confusion in the states of Austria.

It was as recently as last August that Bund yield first fell below 1%. Remember the excitement? On Monday, before the ECB and its national minions launched into the QE purchases, it still registered 0.40%. By yesterday, Tuesday, that yield had fallen below 25bp and I challenge anyone to call this as the bottom. In fact, I found myself exchanging pleasantries yesterday with a major European investor about the value of calls with a zero percent strike.

Meanwhile, in Switzerland, the Cantonal Bank of Zurich (ZKB) issued the first bond with an actual negative yield. The self-led two-year note was announced at SFr100m but strong demand for the issue with an issue yield of -0.2% blew out and it was ultimately sized at SFr300m. The race to the bottom has gone underground.

Across the pond, fear of what the Fed might be cooking up increased which was reflected in a continuation of the sell-off in equity markets. On February 25th, the S&P 500 peaked at 2,119.59 but by last night was 2044.16 – it closed on the low of the day – which represents a loss of over 3.5% from the high.

It might have felt as though the sharp retracement of Friday on the back of the strong Labor Report had taken us off the top but in fact the highs had already long passed. Again, it might not feel like it, but both the Dow and the S&P are back in negative territory for the year

European equity markets still look pretty punchy with the Dax showing a healthy looking rise of over 17.25% and the CAC 40 up 14.25% but when switched back into US$ returns, the Dax is left with modest gains of around 3.5% and the CAC with less than 1%. That might still be beating the US and UK indices but it certainly looks a lot less impressive. As far as investors are concerned, getting the fundamental currency call right is once again the maker or breaker of performance.

Poacher to gatekeeper

The euro is marking one new low to the dollar after another and it would be a brave, if not foolhardy, man who tried to stand between the current rate of US$1.0675 and parity. No great surprise that business confidence in Germany is so high.

While Greece continues to compete with the Apple Watch for headline space, France with its persistent budgetary problems again slips through the cracks. Its chronic inability to not only not meet the Maastricht deficit criteria but not meet them even after being granted extra time to do so shows the sort of disregard for the rules of a club, of which it co-wrote, as Athens, which didn’t.

The supreme irony, however, it to hear EU Finance Commissioner Pierre Moscovici speaking of the possible need to take sanctions against the country if greater efforts aren’t made to control the budget situation. May I please humbly point out that Moscovici – not just a humble Enarc but an X-Enarc (SciencesPol AND ENA) – was until April of last year himself French minister of finance. Talk of poacher turned gamekeeper… or is this simply a case of perfidious and unfathomable hypocrisy?

This morning saw the release of France’s Q4 Non-Farm Payrolls report which remained unchanged from Q3. I can’t quite get my head around how INSEE compiles the numbers but it looks as though one of the largest contributors to preventing the figures from being negative is, you’ve guessed it, the public sector. Energy apparently also hired like fury as did finance but apart from that, things continue to look fairly grim on the employment front.

States of chaos

Now for a little light entertainment. HETA, the “bad bank” element of Hypo Alpe Adria, the ueber-bust Austrian regional bank, has been occupying the minds of the distressed debt markets as analysts try to second guess whether subordinated paper might end worth more than zero and whether senior paper might find some returns.

Into this broke the news that Hypo’s Swiss franc covered bond which was supposed to bear the guarantee of the State of Carinthia doesn’t. In the definitive, German language documentation, the junior geek on the lead managers’ cut-and-paste prospectus desk accidentally made the State of Upper Austria the guarantor rather than Carinthia. The English version has it right but the German version is the definitive one. As Upper Austria never issued a guarantee and Carinthia can declare that it, according to the signed and sealed documentation, isn’t the guarantor, investors might find themselves in an even worse position than they thought they were.

So much for the Yanks with their batteries of lawyers and 19,000 page prospectuses. I remember them at 10 pages for Eurobonds – German Schuldscheine were one page long – but once the Americans took over, it went berserk. Who the hell now reads the darned things? I certainly don’t. That said, anybody who is left holding anything to do with Alpe Adria or its successors can’t complain; they had enough time to avoid this slow

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