When Draghi Speaks, Sell Bunds; When He Shuts Up, Buy 'Em Back
Via Bill Blain of MINT Partners,
The markets mood is shifting from certainty to uncertainty. I've noticed over the last few days clients are less and less sure of their ground. Too much attention on 'end of the world' analyst reports and press drivel. Much of the wibble seems due to doubts whether QE3 will work and what hope is there for global economies, but we're also getting more concern about coming trials like 'The US Fiscal Cliff' as the 'Next Insurmountable' market threat, and the combination of recent Bundesbank snapping at the ECB plus Spain et al. triggering another round of Euro-wobble.
Just to add a seasoning of my own doubts even the mighty new issue market seems to be stalling. If a safe names like the EIB only got a slightly oversubscribed deal done, while a new Deutsch Hypothek struggled over the start line too tight even for domestic buyers then you have to worry. If the mighty new issue stream is drying up (unlike the British weather).. then heaven help us all
Get over it... Uncertainty and greedy borrowers are fact. I would simply point out that volatility looks awfully low, and its maybe time to take a view going long increased vol. The final quarter of 2012 never promised anything except likely excitement.
As Jimbo often reminds us: No point in worrying about it today when you're going to have to worry about it when it happens tomorrow... On the other hand, fore-warned is never a bad thing.
The risk the US will grind to a sickening full stop if/when Obama beats Romney and the Republicans stay in control of the senate seems exaggerated. Its fuelled by political scaremongering: Elect Romney or well shut-down America is the Republicans subliminal message, being delivered by purveyors of right wing thought across the States. As has been shown before, a grid-lock ratings cut is immaterial to the US bond market. And while compromises may be last minute, its unlikely the US will enact automatic budget shutdown triggering deeper recession. Get over it.
Unfortunately pragmatism and Europe are words seldom used together. So its entirely likely the Bundesbank will continue to behave like a scolded toddler stomping its little feet and moaning about the ECB not playing by its rules. But Germans believe the Bundesbank is a raging rock of Teutonic stability in the crazy madness that is Europe, so politically Merkel can't simply tell Axel and chums to shut the **** up and get over it its getting too electorally sensitive.
So despite more soothing words from Draghi, Europe is wobbling. The consensus is shaky. Spain doubts are mounting with the threat we previewed last week of regional independence demands growing. Meanwhile the Greeks are revolting (ba-boom), and they are going to demonstrate on the streets while staging a national strike.
The unpalatable truth about a stable Europe is it takes all its many and diverse participants to be singing off the same hymn sheet. Unfortunately they aren't. The different objectives and aims of each group are becoming increasingly apparent; chancers like Catalunya using weakness to further separatist goals, or technocrats using crisis to further their divine mission to correct foolish political mistakes, etc etc etc.
The Bottom line remains if the Euro can be held together, then Italy and Spain bond yields will tighten. Simple. Unfortunately, the tensions inherent in the system threaten to pull it apart. A brief study of history will show conflict and naked self-interest are the only permanent features inherent to any human system. Name me an alliance, an empire, a union, a nation or any large political unit that has, at some point, not tried to pull itself apart? At the other end of the same scale I'm sure I'm not the only human economic actor who joined in fiscal matrimony with another only to see it collapse in the acrimony of the divorce courts! (Ah still bitter after all these years)
So I'm still betting against the ability of Europe's talented Eurocrats to solve the complexity of the European Gordian debt knot...
Meanwhile.. the global recession gets deeper. Yesterday the slowing European economy caused Volvo to acknowledge slowing truck demand.. Who could have predicted that (US Readers Sarcasm Alert!) And its going to get worse.
A couple of months ago I cautioned the Bo Xilai scandal in China could have dramatic knock on effects on both Europe's luxury good market and German precision engineering. Its certainly not fashionable to be part of the China conspicuous consumption society any more. That means a check to the market in premium wine sloshed down with coke, expensive BMWs and Porsches, and any watch as long as its blingy.
I read in y'days IHT the China government will impose Frugal Working Style rules from Oct 1 banning civil servants from accepting banquets, cars and other expensive gifts. So forget that Ferrari for planning permission, luxury watches in return for an intro, or even a place for the kids at expensive US universities from now on Chinas bureaucrats are going to have to explain how they can afford it. All of which kills the previous German car metric that German exports of premium Mercs to Shenzen were price insensitive. Sell Sell Sell.
And this month's prize for noticing the Titantic has sunk - FT front page reported Bunds have been higher (shock horror) on the back of Swiss Central Bank buying with all the Euros they bought to protect the CHF. Really, Wowser.. and if SNB eases up its buying or changes CHF target.. GUESS WHAT