Japan returned to work today with the Nikkei putting on over 2.5% in a single session, not only playing catch up but by taking the lead. Is there no stopping this rally?
As would be expected of me, I spent most of Tuesday catching up with some of my low friends in high places on both sides of the Atlantic as well as participating in a preparatory call for the quarterly asset allocation committee meeting of an investment management firm on which I serve as adviser on macro economics, fixed income and as general all-round jester. Somewhere along the way, the comment was made that at least I would have nothing to fear in terms of the wealth of subjects on which to comment that 2017 will be tossing my way. That can barely be denied and we are, quite clearly, already off to a cracking start.
Germany yesterday reported its famous raft of CPI numbers, first state-by-state, and then at a federal level. By the time the states had reported, it was no surprise to see the collective December CPI come screaming in at 1.0% month-on-month and at 1.7% year-on-year, well ahead of the consensus forecast of 0.6% and 1.3%, respectively. In the same way as we are constantly reminded of good and of bad cholesterol, there is good and bad inflation and although it would appear as though the long-elusive inflationary effect in the eurozone is returning with a vengeance, what we are seeing is “bad” inflation as it is largely cost-push inflation brought about by the reversal of the basis effect of the staggeringly low energy prices this time last year. Core inflation remains low at, give or take, 0.8% which will not be troubling the ECB. One can, however, spend all the time in the world explaining to Hans and Helga SixPack that all that is happening is that the free lunch that low oil prices provided in 2016 is fading away; as far as they are concerned, they just see pump prices rising and to them that’s bad news. Being an election year, the trade unions will surely not miss that trick.
All the while the UK, rattled by the surprise – or at least it was to the general public – resignation of its ambassador to the EU, was treated to a staggering manufacturing PMI release for December. At 56.1, it was not only well ahead of the consensus figure of 53.3 but the highest reading since June 2014. In July 2016, incidentally, it bottomed at 48.2. Post-Brexit blues? You have to be joking.
So now the key question: is this pride coming before the fall, is what we are seeing the last hurrah before a major wake-up call or is this finally a case of “this time it is different”? I spoke to, among others, two senor bankers yesterday, one in London, the other in New York. The London guy, a credit specialist, was telling me how hedge funds here are desperately looking for the cheapest possible long-dated options strategy to sell the equity market. The state-side fellow, a highly rated equity options animal, was obsessed with finding an eligible way to “short the shit” out of the Bund market. Talk of fear and loathing.
Although markets have been on fire since the US elections on November 8, there is still a lot of scepticism with respect to the president-elect up and down Wall Street. This was reflected in one comment that came my way from the East Coast which read: “Feeling like it will be the year of new policy delivered via Twitter…. Ready, FIRE…… aim”. And yet Ford’s announcement that it is to cancel a planned small car manufacturing plant in Mexico and invest instead in production capacity in Flat Rock, Michigan firmly reeks, despite the implicit denial by CEO Mark Fields during his announcement of the volte face, of Trumponomics in action. If anybody cares to ask themselves why the Donald seems to be so enamoured of Vladimir “put me in” Putin, they need look no further. This has nothing to do with Theodore Roosevelt’s “speak softly and carry a big stick”; it’s “make plenty of noise and swing a tree trunk” and it would appear to be having an effect. In his final campaign speech in Michigan, Trump promised that he would fly to Detroit to personally open every new car plant built. We all laughed – well, I did at least – at the prospect but it would appear that the Putin method of occasionally openly and visibly stabbing people in the chest and not covertly and surreptitiously in the back is about to take root in the US.
Usually the first full day of trading of the New Year enjoys a decent tone as banks scurry around rebuilding their trading inventories that were run down into year-end. Yesterday was unusually active, even by those standards, with what seemed like every bank in the known world rushing out with new bond issuance. There was of course the usual who’s who of German Landesbanks but from BNP to Barclays, from CIBC to BNG, everyone seemed to be on the docket. One credit salesman I spoke to suggested that the two weeks between now and Trump’s inauguration on January 20 is going to see the new issue market swamped as issuers try to get paper away and cash on board before whatever is going to happen happens.
Meanwhile, while euro-enthusiasts conveniently forget the €220bn mortgage that has been taken out in the name of future generations in order to stop Greece from failing and proving that the eurozone project is beset with congenital flaws, Prime Minister Alexis Tsipras reiterated his call to find a political solution between Greece and international creditors after failing to gain noticeable support in his country’s quest for debt relief and less austerity in his December talks with Mutti Merkel. The English bon-mot says “in for a penny, in for a pound”. I suppose the European equivalent is “in for a cent, in for a quarter of a trillion euros”. I don’t know anyone who thinks that the Greek issue will be resolved this year; I don’t. But with Brexit pulling at the system in the North West, the Grand European Project, coming up for its 60th anniversary this year, can’t afford to have someone pull the plug in the South East too. My guess is that Brussels will blink before Athens but how to sell that to French and German voters? I’ve heard of blackmail and greenmail; do we now have to add blue-and-goldmail?