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Thursday, 19 October 2017

When the Kitchen Sink plan works

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Anthony Peters looks at France escaping the reform knife.

IMF managing director Christine Lagarde was for once the bearer of good news yesterday as she confirmed that Greece had completed its timely payment to the IMF and went on to suggest that she – that being the IMF, I suppose – sees the eurozone’s economic prospects improving.

In doing so, she was clearly patting the ECB on the back for its steadfastness. While the British Chancellor of the Exchequer, George Osborne, consistently refused to acknowledge that there might be a “Plan B”, the ECB has been through most of the alphabet until it was able to crystallise plans K,I,T,C,H,E,N,S,I,N and K as the most effective and they would appear to be finally having some effect.

That said, there are still substantial doubts whether we can honestly believe that all the skeletons have been dragged out of all the cupboards, but maybe there are enough on display to generate enough confidence for a re-launch of the European dream. Well, that is everywhere, except in France where 300,000 people laid down tools and took to the streets yesterday to protest against austerity plans, not against the effects of austerity, just the plans.

Throughout my long and deeply undistinguished career in banking – academic history’s loss has been banking’s loss too – I have watched France stagger from one crisis to the other, only to find itself lifted out by global economic recovery. It is said that all boats rise equally on the tide but the French one has always risen faster for whereas in other economies the labour had been cut and production capacity had been mothballed, France had hung on and hung on and was thus, when things improved, more able to gear up again at speed.

I find it hard to believe that France might once again escape the social and labour reform knife, but 10-year OATs at only 29bp above Bunds seem to tell another story. The rating agencies see what I see which is moribund, over-regulated, over-governed, over-subsidised mess which believes that the world owes it a living simply because it is France, the country of Descartes, Pascal, Voltaire and Rousseau (who was, anyhow, Swiss) as well as Sartre and de Beauvoir.

However, it also gave us the War of Spanish Succession, Napoleon who marauded around Europe until stopped on June 18 1815 (69 days until the bicentenary) and the supreme violence in Indochina and Algeria in the 1950s and 60s in the last great colonial wars.

Someone out there obviously does not believe that it is game over for France and that whatever it is that keeps it going is not about to disappear

Through the past three years since the eurozone crisis hit its lowest point, the CAC40 index has been level pegging with the Dax. Measured from the end of April 2012, the total return on the former has been 74.15% as opposed to the latter’s performance of 76.98% which computes to an underperformance of less that 1%, annualised. Someone out there obviously does not believe that it is game over for France and that whatever it is that keeps it going is not about to disappear.

Some of the core metrics such as Industrial Production and Manufacturing Production still look pretty awful and unemployment, stubbornly stuck at 10%, is unsustainable, both in the short and the medium term, but markets seem happy to overlook this and price both French equities and bonds pretty much in line with those of Germany.

Jean-Claude Six-Pack doesn’t seem to care. So long as he gets a month in the Midi in August and two weeks in Les Arc in February he seems to be happy. In the UK, in the current election campaign, the argument is as to how much one can soak the rich for. France does not have that problem for it has, for nearly 50 years, done very well at soaking the Boche. I suppose, the subtext on the streets of France yesterday was that the unions expect that set-up to continue. Asset prices seem to agree with them.

France is of course a great supporter of the “Juncker Plan” which is looking to sink €315,000,000,000.00 into infrastructure investment. Yesterday, Valdis Dombrovskis, the Latvian vice-president of the European Commission confirmed that the flow of funds will not commence until much later on this year or even the beginning of next year. The allocation of the funds is also still open, but I’m sure there will be a proposal for a TGV from Null Part sur Mer to Ste Marie le Desert.

Meanwhile, after a cracking run, US Treasuries took a bit of a hit last night with a very poor 30-year auction. The bid to cover ratio was a mere 2.1 times and the long end of the curve took a pounding in the aftermath with a 7bp back-up in the long bond yield and a bear steepening of the curve.

Mind you, I have to laugh at a line I read from Marcus Ashworth of BESI who wrote yesterday morning: “A piece from Market News caught my eye. Consider this: the 5/30-year Treasury curve bull steepened last Tuesday, bull flattened last Wednesday, bear steepened last Thursday, bull steepened after jobs last Friday and bear steepened on Monday. On Tuesday, the curve bull flattened. So just in case you weren’t aware, no one has a scooby what is going on – and as will be proved later on today neither does the Fed.”

I guess last night’s price action is a case of just another day in paradise.

Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Let’s hope that the hiding place you found for the uneaten Easter chocolate is smart enough and high enough for the kids not have found it. If they do, all the best in dealing with second successive weekend of sugar-fuelled hyper-activity. Better luck next year.

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