Weekly Comment on the Markets, Politics and Economics by Alastair Winter, Chief Economist at Daniel Stewart & Co.
A new quarter presents new opportunities but it might not be a good idea to try too many in the coming week. The main potential banana skins to be aware of are:
US equity investors may over-react to the Non-Farm and ADP payroll if they are not as least as good as the last few months (150K+on average). A succession of slightly disappointing recent data appears to be making some people nervous.
European banks could be hit if enough depositors and investors follow the Cyprus horror show through to its logical conclusion: they will surely bear the brunt of any future bailouts.
The North Korean leadership may actually be crazy enough to believe China will help them in a war against the South and the US.
If any of the above materialise, it is still hard to believe that yields on safe bonds (Treasuries, gilts, bunds and JGB’s) can go much lower but the dollar and even the yen could be in demand, especially if surplus countries carry on unloading euros at the rate that the IMF has just reported they did in 2012.
The recriminations over Cyprus have only just begun. The most distasteful news is that a not- so- very- random group of Cypriot politicians and bankers and their families, together with friends of Mr Putin and other well-connected Russians, managed to get some â‚¬700m of their money out before the haircuts were announced. President Anastasiades has already been accused in the Press of giving inside information. A related scandal has emerged over the two major (now collapsed) Cypriot banks’ forgiving loans to politicians, their families and their business associates. This may cause little surprise in Greece but the message is clear for depositors in Spain, Portugal, Slovenia and Italy as they contemplate the apparent new EMU bailout strategy.
The harsh treatment of Cyprus, no matter how justifiable, will throw the country into a vicious austerity and recession loop that will probably force its exit from the EMU. This will make even more fraught the task of forming a government in Italy and, in fact, probably makes an early second election almost inevitable. Austerity has already been rejected by the voters and now they can see what else lies in store for struggling members of the EMU.
In other words, the Cyprus deal is not only undoing the fragile steps towards banking union but also discrediting any talk of European solidarity. This is why it is such a significant step towards the end of the euro project.
The ECB is looking increasingly irrelevant as the politicians display a distinct lack of European solidarity. Mr Draghi is almost certain to confine himself to solemn words in his press conference after the Governing Council’s meeting on Thursday. Sir Merv will be grateful that he does not need to face the Press as an increase in QE looks unlikely until Mr Carney arrives, causing him a loss of face whether or not he continues to vote for it.
Unemployment tops the data bill in the EMU as well as the US and we can be sure that the numbers for the former will be dire while those for the latter should be no worse than disappointing and probably much better than that.
The floodgates of PMI surveys have already opened and the main interest will be just how awful they are in Europe and how close they are in the UK to the 50 level that marks expansion, especially Services which has managed it in both January and February.
After much shilly-shallying, the S & P 500 finally joined the Dow in passing its previous all-time high in October 2007. This has not so far prompted a major push higher. The Nikkei had one bad day last week and had another yesterday, which hints at some concerns that share prices have gone too far too quickly. It is difficult to tell which is the chicken and which the egg but the yen has been pulling back at least some of its losses of recent months.
After initially affecting some indifference towards Cyprus’s fate, investors decided that the more they thought about it the more worrying it could be. The inevitable result was falling European equity prices (over 4% in Madrid and Milan), lower bund yields with the others going in the opposite direction (especially those on Spanish, Portuguese and Italian bonds) and the euro being given a beating across the board.
UK equities shared to some extent in the gloom across the Channel but gilts and the pound actually gained from it.
Profit-taking may have been responsible for the dollar’s somewhat surprising failure to make larger gains against the major currencies and its even more surprising losses, albeit modest, against some minor ones. Of perhaps only symbolic significant significance was the PBoC’s nudging the renminbi to its highest ever level vs. the dollar.
Did he say ‘template’ or not and is that what he meant anyway? Jeroen Dijsselbloem, Netherlands’ Finance Minister and tyro Chairman of the EMU’s Eurogroup is blamed for spooking the markets when describing the Cyprus bailout. His smooth-talking predecessor, Jean-Claude Juncker, would never have been so blunt, especially as he is Prime Minister of Luxembourg, which has an even more disproportionate banking sector than Cyprus. Certainly, Mr Dijsselbloem did not endear himself to the Cypriot negotiating team who had hoped to out-bluff the northern block by proposing haircuts on deposits of less than â‚¬100K in the expectation that its rejection would result in new concessions. We shall find out soon enough that Mr D did indeed mean a ‘template’ for all the next supplicants.
Mr Bersani had to endure a live streamed meeting with the M5S parliamentary leaders and a bruising encounter (in private) with Mr Berlusconi’s henchman before he concluded that he could not form a stable government. The polls are already turning against him and both MS5 and PDL/Northern League alliance sense they could snatch a win from a second election. President Napolitano (a veteran of the current political system) is so appalled by either prospect that he has appointed 10 wise men (are there no wise women in Italy?) to come up with a solution that preserves Mr Monti’s policies and avoids a new election. As with an increasing number of other proposals to bolster the EMU, this approach is fundamentally undemocratic and could well lead to the exact opposite outcome.
The strong numbers for US Personal Incomes, Personal Spending and house prices have not been enough to sweep aside the disappointment that Q4 GDP was not revised even higher or that the Chicago PMI and Manufacturing ISM came out lower. Any other country would seize such data with both hands.
European was relatively limited but what there was offered no comfort: continuing poor Retail Sales in Italy and Spain and sagging business confidence in the EMU as a whole.
The headline of -0.3% for Q4 GDP growth in the UK was unrevised at the third cut but there was better news in the detailed numbers and in the January Index of Services. These will be discussed further on Wednesday in ‘Economic Insights: 21 reasons not to despair about the UK’