Submitted by Bill Blain of Mint Partners
“Tu el aire que respire yo, y la luz de la luna en el mar. La garganta que ansio,mojar que temo ahogar de amor…”
Am I right to be a tad concerned about Oriental stock markets…? July is a month for lazing, for watching Wimbledon, Pimms over-exuberance and properly long lunches.. Stock market crashes could really ruin the mood. As is traditional, tomorrow I shall be going out for a “proper lunch” to celebrate getting rid of the Americans 242 years ago. However, aside from the Trade Spats, there are other deeper themes bubbling under the surface.
The bear Shanghai market {SHCOMP Index GP
What is going on in China? The consensus is that rising corporate defaults are still being cosmetically massaged to look less damaging, while rising rates and the trade war implications are impacting confidence – classic double whammy on confidence.
My chief economist, Martin Malone, gave me a crash course in the underlying drivers. (I’ll be interested what clients think.) He sees the current slide as due to 1) deleveraging domestic credit to manage excesses in the real estate market, and 2) “trade-friction” from the US tariffs that kick in on Friday! He’s looking the PBoC to carefully manage the situation – economic and financial stability is mantra, not just a goal, in China. Will a resolution of the trade spat (as Jaw,Jaw replaces War, War talk) and renewed negotiations flip the market higher? Watch to see when Xi Jinping’s crisis manager Wang Qishan gets on a plane to Washington.
Another piece of data Martin shared with me y’day were some UN “working age population” (WAP) numbers. By the end of this century Europe’s WAP will have declined by 130mm (about 30%) while Africa will jump from 500mm to close on 2.5 bln. Go figure the policy implications, the challenges and opportunities that creates. It sets your mind on fire. (I’ve attached a snap-shot of the table.)
More immediately, what connects the election of a lefty populist in Mexico, the outlook for Brazilian elections later this year, the migration spat in Germany, rising inequality, and the fact Russia is having probably the most effective World Cup ever (forget their football, (which makes Arsenal look exciting), but focus on the Putin Charm Offensive), collectively tell us? Change is in the air. Next week Trump is Yoorp, but it’s his meeting with Putin that’s getting the focus.
Many of things we took for granted would happen this year look to have become derailed. Our expectations of globally aligned normalisation and economic recovery are fading. Growth hopes have been replaced by headlines about trade wars.
This morning’s news of a truce in Germany as Merkel compromises with Seehofer over migration controls takes some of the immediate pressure off Europe. Let’s be brutally honest – when Germany sniffles, Europe is straight into the high dependency ward. Everything is set for change next year in terms of European parliamentary elections, new EU officials (Tusk and Junker both go – and if I could remember which of them did what, I’d tell you…). There is much danger in horse-trading that will surround the new ECB head (note how the Portuguese just got a former politician appointed!), and it could lead to something very sub-optimal..
And just around the corner is Brexit… (yes, it affects Europe as much as the UK).
Many of the hopes we had for Europe – a new Franco/German drive on Banking Union, common financial, digital, energy, defence and fiscal policies – now look unachievable. Germany ain’t focused externally. The migration deal hammered out last week looks just like what was deemed unacceptably Hungarian just 4 years ago. The Macron dream of closer federation are now mired in internalised factionalism in Germany as Merkel clings to her wobbling throne as German politics drift rightwards into the arms of the AfD. Italy is heading for confrontation with Europe over finance and fiscal spending.
In short – there is a European crisis brewing. But… there is always a European crisis… its just the way of things….
How to play it? If you buy the scenario Europe is unlikely to be fixed any time soon – that means there remains value in European bond markets: what alternative will a more politically orientated ECB have expect QE forever? Or is the state of Europe just something that is, get over, and look for bargains – there are some very enticingly cheap looking stocks out there.
In terms of the US, it’s a very different tale. I’ve been talking with my bond structuring team in Paris (part of our sister firm Aurel) who’ve been active in Constant Maturity Swap (CMS) deals – a levered play on yield curve steepening. You can still read acres of copy about how the flattish US curve means a looming recession – or is it simply the effect of the US economy being on track to normalise quickly – in which case curve-steepening plays make screaming good sense. If anyone wants updated pricing on US$ and Euro curve plays – let me know!
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