“Looking At These Markets It’s As If We Have All Been Drinking Pan-Galactic Gargle Blasters”
Submitted by Michael Every of RaboBank
What a day, and what a headache. Like many of us, including central bankers, I look at markets right now and hold my temples, groaning. It as if we have all been drinking what the Hitchhikers’ Guide to the Galaxy calls “the best drink in existence”–Pan-Galactic Gargle Blasters–the effects of which are similar “to having your brains smashed out by a slice of lemon wrapped around a large gold brick.” Except in this case it was Pan-Galossian Gargle Blasters we were drinking. While you are on those, “all seems for the best in the best of all possible worlds”…and then you get your brain smashed out by a slice of lemon wrapped around a large bold brick.
Let’s start with the ECB, where as our monetary Kremlinologists de Groot and Van Geffen report in ‘To Infinity and Beyond’, we saw what looked like quite the policy cocktail yesterday. ECB rates were cut further negative, and QE was restarted at EUR20bn a month with no time limit for when it stops, with open calls for governments to spend more (to produce bonds for the ECB to then buy). “Mmmm…MT, that tastes delicious!” thought the markets, as EUR and yields tumbled. Mario Draghi, in his swansong, must have been delighted.
And then we got our brain smashed out by a slice of lemon wrapped around a large gold brick as the market started to realise that QE can only run for around 12 months before there is nothing sovereign left to buy. Furthermore, it was revealed that rather than being unanimous, this policy decision was rejected by Germany, France, the Netherlands, Austria, and Estonia. In other words, MMT-lite (because does anyone ever think central bank balance sheets are going to be reduced after the recent Fed experience?!) is being pushed by peripheral Europe and resisted by core Europe. Over to you, Christine Lagarde: you inherit the hangover!
EUR/USD, for example, tumbled from 1.1020 to 1.0930 and then rebounded to 1.1060…so the currency is slightly stronger post rate-cut and QE; 10-year Bund yields are at -0.45% when they started yesterday at -0.56% and at one point were -0.64%…so core borrowing costs are higher post rate-cute and QE; and 10-year Italian yields are 0.88%, which is well below the pre-ECB level of around 1.00%, but far above the intra-day low of 0.75%.
Let’s continue with the US, where the Fed is, of course, going to save us all by slashing rates – by adding more booze to the punch rather than taking the punchbowl away. Except that the CPI report yesterday ran hot again. Headline CPI was up 0.1% m/m and 1.7% y/y due to low energy prices, but core CPI was up 0.3% m/m and 2.4% y/y – and the 3m/3m change is even more dramatic. In any alcohol-free environment with unemployment this low and core CPI that high, the talk would be of when the Fed hikes, and how much, not cuts, and how much. 10-year US yields hit 1.66% yesterday at the low and yet are now at 1.77% hitting 1.90% (rounded up) at one point. Again, many brains being smashed out by a slice of lemon and much talk of large gold bricks (and other things gold).
Let’s continue with the US and China trade issue, where stories broke yesterday that after recent goodwill gestures we were on the edge of an interim trade deal where the US sells agri products to China and also delays an increase in tariffs, perhaps even not imposing the next set due 15 December or removing the USD112bn worth that went on some consumer goods this month. A mini-deal might still be possible. But the Pan-Galossian view that the trade war is about to end was rapidly followed by a smash and crash and hangover as the White House said it was “absolutely not” considering an interim deal….though Trump then said he might…and tweeted China would be buying “large amounts” – so he’s already setting the terms of the mini-deal or the walk-away. Oh my head! Note that this should come as no surprise to markets by now: but somehow it always does. What IS surprising is how strong CNY currently is regardless: acts like it lifting quotas on foreign portfolio holdings are surely a sign of a USD shortage, not a sudden commitment to openness. Then again, nothing will look real until after 1 October.
Let’s blearily focus on Brexit, where a deal might be on the cards, some whisper, if only the circle on Northern Ireland can be squared: lots more drink will likely be required to make that workable – see ‘Hurricane Brexit’ for more from Stefan Koopman. Meanwhile The Guardian leads today that Speaker Bercow, about to bow out, has “threatened Boris Johnson that he will be prepared to rip up the parliamentary rulebook to stop any illegal attempt by the prime minister to take the UK out of the EU without a deal on 31 October.” Bercow states he will allow “additional procedural creativity” to ensure he gets what he wants and Boris doesn’t get what he might want. From an institutional perspective that’s like watching someone drink a Pan-Galactic Gargle Blaster and collapse in a heap of vomit and saying ‘Make mine a double!’ Bercow also proposes a written UK constitution – which I am sure will be arriving far after the hangover from all this. GBP is still acting drunk though at 1.2330.
And then let’s consider Iran, where suggestions are that the US might agree to Europe offering Tehran a USD15bn credit line pledged against future oil revenue as a good-will gesture to get a Trump-Rouhani meeting. Regional experts make clear this Pan-Galossian view of how the Middle East works is as likely to get a deal as the current US-China stand-off is. (And actually the Iran issue is just a stepping stone to that larger clash. Yesterday a human rights bill focused on Xinjiang passed the US senate, and the Pentagon spoke about the need to decouple China from US industrial supply-chains for national security reasons.)
Lastly, markets. How could we have run from 1.47% to 1.80% in US Treasuries so fast? Partly it’s been swinging from a terrible post-2008/9 hangover to another round of Pan-Galossian Gargle Blasters in the hope that this will all go away: which has been standard policy since the financial crisis. But might it also be partly that passive money like ETFs now outweigh the total capitalization of active funds? If so, the Mother of All Hangovers lies ahead for markets at some point and no booze will cure it.
Fri, 09/13/2019 – 18:45