Wednesday, 18 July 2018

What's another year?

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SwissInvest strategist Anthony Peters reflects on a year that proved almost everyone right – for a while, at least

Anthony Peters, SwissInvest Strategist

I HAVE BEEN writing comments on markets for the best part of 20 years. I have had bosses who hated it and tried to switch me off and I have had bosses who loved it and encouraged me to write in the vain hope that I might just plug traders’ axes. I have clients who read everything I write and I have clients who have probably never read a line.

However, through the ups and downs of the years I have always ended the year with a confession in which I review my best and my worst calls of the year. This year has been special because one has been able to make pretty much any call and it has, for a while at least, been correct. 

Of course, I feel like something of a wise fool in that I declared clearly that Greece would not default – and it hasn’t. The bonds might be trading in the 30s – and down into the 20s in the longer dates – but they have not defaulted.

And this is where I come to begin my summing up. The failure of ISDA to declare a credit event on Greece – I wonder who has the revealing photos – has taken the world we all knew and turned it upside down.

This is the year in which liquidity melted away with the effective decapitation of derivative-based hedges. Most of all it was the year when the principle that if a bond paid timely coupons and was redeemed at par, it had done what it said on the tin lost validity.

European authorities still think that political will and the frantic desire to prevent the grand European project from unravelling means they can decree that black is white, that night is day and that a default is only a default when they decide it is. They have done all they can to rewrite the many thousand year-old rules that govern lending and I suspect that when this error of judgement comes back to bite them, it will do so in spades.

That sovereign CDS is no longer an entirely reliable hedge is now clear, but we have also experienced some curious moves by ISDA in the corporate space, especially in the event of SEAT Pagine Gialle, the Italian yellow pages provider, which has proved to be one of private equity’s bigger disasters.

This year has been special because one has been able to make pretty much any call and it has, for a while at least, been correct

But it is not only corporate and sovereign credit that is unhedgeable without taking significant basis risk. The big DTB Bund contract is also in trouble. Not, of course, because the Bund is close to default but because of the way the DTB has squeezed out the likes of Paris’s MATIF and Milan’s Telematico.

The DTB Bund remains the last and only euro government bond future, but with spreads between Bunds and their next best friend, the OAT market, swinging by as much as 20bp in a day – and by a lot more in more troubled names – its value as a generic hedging tool is now next to nothing. When the hedges go, so does market-making and when market-making goes, basic day-to-day business is effectively up the spout.

I SUPPOSE MY worst call of the year was not to appreciate that the industry was not only going to shrink – which I did predict – but that it would change beyond all recognition. Physically, it still looks much the same – nobody has moved out of prestige offices and into converted suburban factories with plywood desks yet – but any number of faithful old chums, many who have been stalwarts of the business for decades, have collected their papers for the last time.

From a personal perspective, this is of great sadness. When I learnt this trade, it was purely a people business where we were all aware that if we did not take care of each other, nobody else would. It was a game of give and take and so long as nobody took too much and gave too little back, we got a lot done and made a reasonable living. As these guys switched off their screens for the last time, much of the old ethic of leaving something on the table for the next guy went with them.

ANOTHER POTENTIALLY HUGE shift is the Tobin Tax, the mere prospect of which has already led to what might prove to be an irreconcilable breakdown in the relationship between the UK and much of the rest of the EU. Seeing the glassy eyed focus with which France and Germany have turned on London, it is easy to forget that not so many years ago Finanzplatz Frankfurt and Europlace Paris were openly competing to replace London as the financial centre of Europe.

If you can’t beat them, take them out. The “victory” of the DTB over LIFFE as the centre of Bund futures trading in Europe was once looked upon as the beginning of the end of the Square Mile. What is funny, though, is that London used to be the home of the Eurobond market, which developed in order to arbitrage US-centric tax laws. It died a natural death as deregulation opened markets and globalisation took hold. The EU has now decided that it doesn’t need the lessons taught by King Canute and that it can hold back the tide. In doing so, it might give the perceived arch enemy, the City of London, a fillip as a home for offshore euros as it was once for offshore dollars.

If you thought 2011 was an interesting year, wait for 2012 …

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