Blain's Morning Porridge - What's really happening re Sterling?

Blain’s Morning Porridge October 10th 2016

“I must not fear. Fear is the mind killer. Fear is the little-death than brings obliteration. I will face my fear.”

Forget about weaker than expected US payrolls, or what Trump and Hillary threw at each other last night.. the big question is what's really going on re sterling? Enough panic.. sit back and relax.

There is a substantial school of thought, fuelled by the liberal press, reckoning the collapse in sterling is because the Brexit Bill is coming due. The negative rhetoric out of Europe, Theresa May's handbag waving and setting deadlines, and the lack of planning ahead of the referendum, means the markets finally smelt the coffee, understand and have woken up to just how deeply damaging Brexit will be to the economy.

Others say the reason sterling looks like a third world currency is because the government is setting a new unknown fiscal strategy agenda and seems on collision course with the Bank of England’s monetary driven games.

While appointing her awkward squad of Johnson, Davies and Fox to the foreign office, trade and Brexit roles as seen as brilliant political move at the time to quarantine them... now it’s being seen as "unwise" and political expediency too far.

The result is a fearful market reassessing the prospects for the UK - and discounting the future of our blithe little Island heavily. As wiser heads than mine have said.. the only thing to fear is fear itself.

One article I scanned this morning predicts UK banks - currently one of the brighter spots in the dark-matter minefield that is European banking - are set for a massive spanking as the costs of Brexit come due. Massive downside for Lloyds, Barclays and HSBC as they find their openings into Europe closed and new business denied them.

As the UK economy staggers into collapse, I wonder what that means for Europe? Since we won't be buying their cars, power plant or food products.. who will?

There is historical precedent.. At the start of the 19th Century French foreign policy was about bankrupting this nation of shopkeepers to stop us funding the rest of Europe against them. The "Continental System" was a embargo against England - but had the effect of ushering in the UK's era of commercial greatness as trade actually rose as we seized global markets while France remained fixated on stopping European trade.

One of the major reasons Napoleon invaded Russia in 1812, ultimately crashing the First Empire, was the Tsar's continued trading with the UK. His brothers, unwisely promoted to Kingships across Europe, were equally guilty of breaching the system and trading with the UK.

Nor was there any reason for Theresa May to declare a March deadline on Article 50. Take a lesson from the Europeans. Keep kicking the can down the road. With French and German elections, and the Italian referendum, Europe will likely have other things to worry about than being Beastly to Britain. Don't negotiate with Brussels - play to Berlin, Paris, Madrid and Rome.

However, there is another school of thought to explain the current sterling crisis. The pound crash is yet another example of Momentum Illiquidity: where thinvolumes and nervous markets over-react to thin news to trigger extreme volatility.

Some BoA analysts say any trade done in today's thinner markets influences prices 60% more than the same trades done in more liquid pre-crisis days. The result is markets a far more susceptible to rumour and sigh, sturm und drang, and all the bad stuff.

My own view? Brexit should not be a crisis now.. We don’t know today and won’t know tomorrow. It will be a dynamic process. Pragmatism nd global trade should win out. Protectionism in never smart. My core belief is this should not be a sell UK moment. If anything Brexit should be a short-Europe play.

From the perspective of European hard-liners, they feel it’s very important they are seen to be "Tough on Brexit and the Causes of Brexit" - which boils down to punishing democracy.

As long as Europe's national leaders continue to follow the EU line - for either reasons of national prestige, ie France, or because they think they can still get more out than they put in.. ie everyone else except Germany, or because they are Germans who think everyone else plays by the rules - then the rhetoric will remain negative.

But... why play to that agenda? Look for positive – there are many, and not just in terms of resurgent UK confidence and growth. Europe should share!

And does anyone really think foreign banks in London will move their operations to Frankfurt? Apparently the Germans have been in town and presenting Finanzplatz Deutscheland.. If you are convinced - please give me a shout and explain what I'm missing?

Frankfurt is lovely town - but it is not a great City. Personally I would not have any problems with living there myself - but as banking capital? Even a just a few bankers would utterly swamp and change its character. I remember reading there are more people working in the City of London than live in F'furt.

So full marks to JPM's head honcho – spotting the real winner is going to be New York. Just like everything else in markets then...

Back in the bond market. We are working with some very good friends from Germany on a secondary bond placement for a BBB- rated European renewable firm with major business. It’s a great story worth investigating, and a secured bond structure that should appeal to many holders. We're looking to get management across to London this week for a roadshow, and with a 6% yield this is a deal to be looking at. If you want further information.. please get in touch.