Whatever Monday did not give us in terms of market activity, Tuesday made up for in spades. The flood of new issues in all debt and credit markets was of biblical proportions which is encouraging but anyone who thought that something in the New Year would be different in terms of pricing or allocation will have been sorely disappointed.
Anthony Peters
SwissInvest strategist
Let’s face it, we might be in a new accounting period but the realities of the economy with its embedded challenges continue unabated.
Three major themes which will no doubt be with us for the coming months are already crystallising in the form of Chinese public sector indebtedness which is bad, the falling American trade deficit which is good and the issues of France and Italy, the sick twins of Europe, which is best not talked about in case it rocks the EU boat (which is for the next six months going to be captained by none less than Greece). For the moment it appears as though these themes are confined to the back-burner as enthusiasm for the New Year cash influx has gripped markets and buyers dive in as though stocks were about to run out.
… don’t worry about the pricing levels here – buy and hold for the rest of the month, then review.
Buyers? There is a repeat pattern which I have been observing for what is now decades and which plays out to the same script every January.
The year begins with the large trading houses entering the fray with flat books after the fire sale period in December. Inventories need to be rebuilt and the market catches a sharp bid. This process has been reinforced by the disappearance of the old style investment banks which closed books on November 30th – that’s the Goldmans, the Stanleys and the Merrills of this world – which used to act as a counterbalance to the banks and who used to make a small (or large) fortune out of being the bid in December and the offer in January.
Institutionals
Major institutional investors in the insurance and pension space are not really party to the rally as most of them are still busy with year-end reporting and most of them won’t really be ready to jump into the pond until mid-month at the earliest. Nevertheless, a feeding frenzy takes hold with every teenage trader (mentality, not age, I hasten to add) on the planet chasing the rising market. It normally takes until the first or the second week in February for dealers to appreciate that they have been getting ahead of themselves and for more a more realistic pricing process to set in.
However, nobody can afford to be short during the January madness and so even wise heads hop on board for the ride. Apart from that, it is rare for the February correction to bring levels to below where the year began and hence getting long early is no bad thing. It might be a case of the blind leading the blind but if it gets then to their desired destination, who cares?
Meanwhile, fundamentals won’t be getting too much of a look in and whatever financial and economic crises might be bubbling below the surface will be kept under wraps by the blind enthusiasm of self-congratulatory market behaviour. If anyone has one good reason to believe that the opening phase of 2014 trading should be any different to that of previous years, please speak now or forever hold your peace. In other words, don’t worry about the pricing levels here – buy and hold for the rest of the month, then review.
However, the technical aspects of the markets should not detract from the rather smart new €3¾bn Irish government 10-year bond which, in my view, must have been deal of the day. There is a certain amount of tacit acceptance that Ireland has taken its post-crisis, post-bailout healing process very seriously and it is keenly shown off as being a prime example of where troubled European sovereign borrowers should and could all be going. In fact, it is now pricing at no more than an adjusted 104bp above France.
That its crisis was in the private and not in the public sector is frequently disregarded and comparing it, its crisis and its recovery to anything in the garlic belt other than maybe to a certain extent Spain, is fatuous. That should not detract from the huge effort put up by the Irish and seeing it trade way through the pricing level commensurate to its credit rating should be applauded as nothing other than a further case of the markets being ahead of the ratings agencies.
Sell France to buy Ireland? Has anyone got the courage? I have been watching and doubting France for 30 years but have learnt the hard way that being short France is a dangerous and usually loss-making game. 2015 is the bicentenary of Waterloo. Until then it will surely still not be safe to bet against it, Hollande or no Hollande. CGT or no CGT.