Thursday, 20 September 2018

What to make of Sabine's sabotage...

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Anthony Peters mulls the breaking of ranks on QE in the ECB.

Well, well, well. Who would have expected that? Or perhaps, who would not? Sabine Lautenschlaeger, member of the Executive Board of the ECB and vociferous representative of the Bundesbank’s hawkish response to Mario Draghi’s “whatever it takes” philosophy was out there last night in Munich making her case that there was absolutely no need for further monetary stimulus.

She certainly has a point. She has long argues that the risks which excessive liquidity poses to financial stability outweigh the effects of QE. Since the early days of the crisis, Germany’s stance was that root-and-branch structural reform was the way forward and that the central provision of easy money would do nothing other than defer the bitter pill being taken by inefficient economies. To some extent the Germans have been right although some good work has been done in a number of peripherals in order to bring arcane labour laws and working practices up to scratch.

Thus it is not totally surprising that Madame Lautenschlaeger would be happy to take the foot off the gas. Hence she made her case quite clear last night by stating clearly and up-front “For me it is clear: At this time, I see no need for further monetary-policy measures, especially not for an expansion of the asset-purchase programme”.

So far, European markets have been basking in the afterglow of Saint Mario’s soothing words on Friday that the ECB will do whatever it takes to meet its 2% inflation target as they interpreted that to mean that QE was now as good as open-ended. In intraday trade yesterday, the euro briefly dipped below US$1.0600.

Lautenschlaeger will again be leading the opposition within the ECB on the basis that ““The euro area does not find itself in a situation where further monetary-policy easing is without alternative. We should give the numerous and, all-in-all formidable, monetary-policy efforts time to show their full effects.” I sympathise with her position but I can’t see her gaining too much traction, least of all on the back of Japanese November Manufacturing PMI.

Why that? Simple; the fans and proponents of “Abenomics” are out there in force today declaring the improvement in the perceived state of the manufacturing sector to be living proof that QE “à outrance” eventually works. Detractors, the likes of Lautenschlaeger, are probably more prone to believe that cyclical recovery has as much a role to play as stimulus and that a naturally recovering European economy has not need, to remain topical, of either monetary Viagra or Botox.


Which neatly leads me back to that subject. The expected merger/take-over/reverse take-over/tax arbitrage between Pfizer and Allergan was duly announced and the political class of America is up in arms. Chief cheer-leader is Hillary who is trying to find a reason why company boards should be obliged to ditch their statutory fiduciary responsibilities towards their shareholders for a common good which is neither common nor good.

Given the way Washington loves to fine companies for uncompetitive behaviour, one might be led to believe that the powers on Capitol Hill would grasp that they are being perfectly legitimately outcompeted on a fiscal front by foreign governments and that until the warring Democrats and Republicans and the warring factions within the latter focus on levelling the playing field, they will continue to be be batting into the wind. Closing loopholes does nothing other to open new ones.

Ian Read, Chairman and CEO of Pfizer, suggested when interviewed that the merger made strategic sense on all fronts and that all the tax angle affected was the price. Well, to quote the late Mandy Rice-Davies “He would, wouldn’t he?”

Sterling events

There is much in the press still with respect to tomorrow’s Comprehensive Spending Review. Westminster and the UK Treasury seem to have more leaks than a Welsh vegetable market although I trust little of what I hear.

The news will be in what we haven’t been told. I’m still pretty sure that the accompanying Autumn Statement will have a revision of the treatment of pension savings in order to off-set the effect on the wealthy to the anticipated cuts in welfare.

Not that pollsters have been having the best of times of late but, nevertheless, ORB has come up with one which has a 52% majority of Brits in favour of a Brexit. This is already looking like a fight which Dave “you may now call me David again” Cameron is going to struggle to win. The referendum is too far away for markets to be able to take according positions and trading on the outcome would be, at this stage in the game, a little silly.

FDI, on the other hand, might begin to fade and with it the currency. Time maybe to begin to reduce exposure. Sell the pound to buy the euro at €1.42 for a long term trade doesn’t look too stupid.

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