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Tuesday, 12 December 2017

US stages a rally while eurozone is mired in a soap opera

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Anthony Peters, SwissInvest Strategist

“May you live in interesting times” – so the oft quoted and supposedly Chinese – though probably not at all – proverb. There is little doubt that we are doing just that. The eurozone crisis is turning into a fully blown soap opera where every day’s episode ends with a new cliff-hanger and where strings of plots and sub-plots chase each other on and off the stage.

Wrapped in it all there are occasional moments of high comedy which help maintain interest. Press reports yesterday which named the Mafia as the largest and by far the most profitable economic enterprise in Italy had us all smiling, but I think the biscuit was taken yesterday by Denmark’s Prime Minister, Helle Thorning-Schmidt, who on the day on which Denmark formally assumed the leadership of the EU Council also had to announce that the leaders’ meeting planned for January 30 in Brussels has had to be rescheduled to January 29 because of an planned general strike in Belgium on that day.

Searching for the self-repair button

The European fiscal system is still trying to find the self-repair button. Both Lucas Papademos, the Greek Finance Minister for whom I have huge regard and Mario Monti, Italy’s Caped Crusader, have left little doubt that, as things stand, their countries will need much, much more support if they are not to keel over. Papademos was more explicit – as he would have to be – by letting it be known that of its own doing, Greece will not be able to meet the impending coupon payments and redemptions which fall due in March.

Seeing the bond, which falls due that month, the GGB 4.3% 20-Mar-2012, trading at just above 40% face value a mere nine weeks ahead of maturity, speaks volumes. Eurozone peripherals had a “good day” on Wednesday but that still left 10-year Italian yields at 6.90%. No wonder Prime Minister Monti is calling for a much stronger bailout fund.

Lagarde vs Mutti Merkel

All the while, IMF suprema Christine Lagarde is bending Mutti Merkel’s ear about the eurozone – this is polite-speak for Germany – needing to put up more money to save the system. The Handelsblatt refers to “a significant double-digit billion” amount. In the middle of this, my second most favourite supplier of vacuous outpourings of “eurobabble”, Herman van Rompuy (number one remains Jean-Claude Juncker) decided that it was time for him to praise the ECB for its “firm actions” and apparently declared that it was open to “new developments”. I am so glad and so relieved to hear his reassurances.

Does anyone remember the humorous piece which was, I believe, initiated by Nick Parsons, head of research at the NAB, towards the end of last year which suggested that, given the cast-iron assurances by Jean-Claude Trichet that Greece would be fine, we pay his pension in Greek bonds? In the two months since his retirement (Trichet’s, not Nick’s), the GGB 6.1% Aug 2015 alone has lost another 20% in value (from 30.00 to 24.00). How can anyone be surprised that real institutional investors with other people’s money at stake are so very sceptical?

US equity markets defy sceptics

And yet, as the FT points out this morning, US equity markets are defying all the sceptics and are performing gangbusters. On closing prices alone, the S&P has rallied just over 17-1/2% from its low on October 3 when it closed at 1099.23 points. Last night it closed at 1,292.48 points.

At a time when analysts are falling over themselves to downgrade earnings estimates – it is rare to see so many downgrades so early in the year – one would expect nervous trigger fingers on the sell button, not on the buy button. Economic news has across the board been considerably better than consensus forecasts would have you believe, but as second and third looks confirm, the headlines hide the exceptional items which seem to be boosting the outcome.

Fed’s Beige Book

The release last night of the Fed’s Beige Book supports this interpretation in that it remarks that although the economy expanded at a “modest to moderate” pace, the hiring which pushed last week’s December Payroll Report to such a positive outcome was in most cases only short term and temporary and that the housing market remained sluggish.

Many reckon that the recent boost is only a little pop and that there is a strong risk of it tailing off again pretty soon. Arguments can be made both ways, as ever, but investors should never forget that being right alone doesn’t make the performance – it’s being long when it’s going up and not when it’s going down. Hence, I would not be at all surprised to see the current equity rally gain further momentum. In periods of low yields and uncertain developments, trading fast beta – that’s volatility – is as good as seeking alpha.    

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