Submitted by Bill Blain of Mint Partners,
Another day of fraught wonderment ahead of us. What does it all mean? China economic data increasingly suggests there is a serious problem, (that’s still a few points below crisis – but recent experience suggests the politics of mobs can turn ugly with surprising speed!). On the other hand, yesterday’s US auctions went swimmingly well – so we can all relax about the taper? Er.. no. And while Spain gets a cheeky 15-yr bond issue completed (driven on the back of a large single order we strongly suspect), the Italians then get downgraded because of the weakening economy, deteriorating competitiveness and 1.9% negative growth outlook... “You can’t make this stuff up,” comments Chris, my head of Govvie Trading.
So its heads down, and pick the bones out of yet another messy market. Europe problems back to the fore – but volumes are tiny, and I really don’t think anyone cares very much. ECB chappie Ass-mussen saying rates might stay low beyond 12 months doesn’t quite have the reassuring impact Draghi had last week. We’re wondering if Spain is next on the ratings hit list, and there is yet another political crisis brewing about illegal payments. Same old, same old…
There is nothing quite like a summer crisis in Europe.. Yet the hoo-ha over Portugal does seem to have blown over. Don’t believe that for a second.. we don’t yet know what the cost of keeping the fragile coalition will prove to be – we suspect even a slight Portuguese course change puts them in collision with Europe.. again.
Meanwhile, in a galaxy far far away... (I think I’ve used that too many times recently when differentiating Planet Earth from Yoorp!)..
The Bells of London are ringing with joy unconfined this bright sunny morn as the IMF says UK is poised for stratospheric growth! Of 0.9%?? wowser (US Readers: deliberate use of lower case to suggest mild sarcasm.) And Moody’s has raised its UK banking outlook from negative to stable to reflect UK’s increasingly stable economic outlook, and the fact the banks are generally in better shape after improving asset quality, capital ratios, funding and liquidity “metrics” (I detest that word), improving profits and efficiency gains. They remain concerned about long term “systemic support” for the big banks – who can be surprised when government has made “exhuberant banking” a hanging offence.
Whateva.. George Osborne must be dancing a jig and considering replacing the wallpaper in No 11. After all 0.9% is a positive number so hang out the blue bunting, set the band's a'playing, and lets all be deliriously happy. Lions, Andy Murray and now the IMF!
Contain my cynicism for a moment. 0.9% growth is better than 0.3% in Germany or -0.6% across Europe, so Osborne will be explaining success to Tory MPs ("well Toby.... 0.9 is a bigger number than -0.6.... do you see how that works?") But Mr Osborne probably shouldn't share anything more complex with his legislators lest they catch a whiff of things less than wholesome...
Friends fed me dinner last night, (She-who-wishes-to-be-Mrs-Blain is working on a contract outside town leaving me to fend for myself during the week... I know.. shocking, but that’s modern gals for you...), and him being one of the UK's businessmen actually making something, we discussed the prospects for UK industry in a lower sterling environment.
The conventional wisdom is weaker currency = hurrah for exporters. Unfortunately, previous weak sterling moments have seen precious little export growth.. you need a a manufacturing sector for that particular trick to work. Might work for Japan.. probably not here. Instead, the risk is lower sterling will simply import inflation. And all the entails..
Then we have improving confidence across the UK - apparently. I worry how much that is fuelled by house price gains - again suggesting increased indebtedness contributing to the rosier picture. Again all that entails as and when UK interest rates head back towards tropospheric normalcy and we get a housing crash.
And if we get growth, the banking transmission mechanism to ensure companies get the capital/dosh they need to expand is so broken and wrapped in regulatory red-tape that growth is going to be more about finding 20 quid notes on the street rather than getting expansion funding from banks! (Hang on.. I got an idea about that.. but means opening up the tomb of the CLO market… dah dah dah!)
And even the IMF admitted the slight 0.2% revision in UK prospects didn't mean much - "the recovery is weak, and policy makers should ensure the recovery is improved." Don’t underestimate the capacity of the UK’s elected leaders to get this completely wrong and snatch economic defeat from the jaws of growth!
Meanwhile the IMF warns Europe faces worsening economic headwinds requiring "additional policy action" and more "do what it takes moments"! Good luck on that ahead of the September European elections.. oops.. sorry... meant Germany..