Blain's Morning Porridge - Europe - what does it all mean.. and might we be wrong and its a cont
Blain’s Morning Porridge – March 7th 2017
“Jack, you have debauched my Sloth!”
I anticipate a barrage of complaints this morning.
I really do have to scribble some thoughts about Europe, meaning a bunch of European readers will complain. As I’m writing from London, it must be a nailed-on fact I am biased against Europe and the Euro, can’t possibly understand the deep-seated imperative towards closer Union across the Eurozone, and as an Anglo-Saxon I’m bound to be wrong about basically everything…
Fortunately, I’m not Anglo-Saxon – I’m a Scottish Celt, which historically means I’m genetically more favourable to Europe than any Englishman ever was. But, even my Euro-tolerant DNA doesn’t change my view Europe is wading into deeper and deeper solids.
Let’s consider some evidence:
This morning, in the FT, an article by Marcello Minenna of Consob, the Italian regulator, reminds us some 47% of Italians think the Euro is a bad thing compared to the declining 41% who are favourable. No Sh*t Sherlock award winging its way to him for telling us Italy “is saddled with high levels of public and private debt, meagre growth prospects, and persistent political instability.” He blames the Germans’ “crusade for fiscal virtue”. It’s even tougher to imagine how Italy could exit Europe – its Target 2 imbalance stands at Euro 360 bln! That’s quite a significant number for a European economy that was supposed to be free of such imbalances…
However, the crux of Minenne’s article is what the basis between Italian CDS is telling us – the new 2014 contracts protect against debt redenomination while the old 2003 CDS doesn’t. The basis is widening – confirming the market believes the risk of redenomination is rising. That’s particularly true of Italy and France where the basis between the 2 contracts has doubled in recent months!
The market is clearly anticipating potential trouble and rising break-up risk.
Meanwhile, look at the hype towards this week’s ECB meeting. It hasn’t helped that moving to a 6 week cycle means the teenage scribblers have less to write about – meaning the few meetings they still get require even more speculative imaginings.
Which is why we’ve got all kinds of comment and analysis suggesting the ECB may announce something surprising like further tapering its QE programme or even giving forward guidance about raising rates later this year.. At least some of the pressure from Germany to hike European rates in the face of rising German prosperity might have taken a knock this morning after German factory orders crashed 7.4% in Jan.. (Don’t worry about it – it’s a volatile number series..)
And also this morning, a Bloomberg article tells us the ECB will begin to taper in January with rate hikes from Jan 2019 – assuming nothing goes terribly wrong in France, Italy, Germany, Greece, etc etc in the meantime.. The taper will be announced in September to commence in Jan 2018, giving plenty of time before the first hike. I wonder if the Germans will have the patience for such a softly softly approach?
I should imagine politicians from Lisbon to Athens, from Syracuse to Liege are looking forward to rising rates with rapt anticipation and wondering what that means from their 30% youth unemployment numbers. Don’t worry… Europe’s disenfranchised masses will understand perfectly why their job prospects must be sacrificed to save Germany from inflation.. Er.. probably not.
European data is improving – but does that matter? Politics remain the dominant factor at present in setting market expectations. Market expectations are going to shift dramatically as the news from the current Electoral calendar comes in. No matter how good the data is, if it doesn’t morph into improved jobs then the political backdrop will remain awful.
Yet, the market has history mispricing European risk.
At the moment the news flow and sentiment direction – especially here in London – is profoundly negative on Europe.. Which might just be a mistake!
There, I’ve said it…
Over the past 10-years, nothing has been so certain as the ECB and Europe’s capacity to confound London with its longevity. The more we predict the Euro’s demise, the more solid it becomes. It’s a great contrarian trade. If the market says sell Europe… buy..
But, If I’m saying buy Europe… does that mean you should sell? Confused.. you will be..
Meanwhile… the market hasn’t responded well to Deutsche Bank’s recapitalisation news and “deckchairs on the Titanic” shifts in executive responsibilities.. 12% down since the announcement y’day. Amid rumours of staff defections and disgruntled investors.. John Cryan is 100% committed to his plans..
Well that’s a relief then…
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