Equity markets seem to be taking the view that the worst of this recession is behind us with four good days of positive trading last week. Let's hope they are right. In the absence of any data showing that things are stabilizing let alone turning around I remain wary. February numbers from Russia's St.Petersburg container terminal show a 27.3% drop in February volumes from the year earlier period. By the same measure Los Angeles cargo traffic is down 35% although some of this decline may be due to the Chinese New Year. This bull market rally will probably last as long as it takes for a fresh wave of money to be drawn into the market and then on swelling volume the traders will reinstate their short positions.
Switzerland decided to intervene in the currency markets last week to reverse the relative strength in the Swiss Franc. An immediate beneficiary of lower interest rates were all those Hungarians and others who had taken out mortgages on the Budapest and Riga villas in Swiss Francs. Elsewhere in the currency universe it's gone very quiet. Chancellor Merkels comments yesterday about the need to see how the existing stimulus measures work before pushing for any additional programmes seems to me to be important. I'm more and more of the view that the ECB is working on a guarantee programme that will bail out Ireland and Greece (possibly Portugal ) but only in return for the imposition of strictly monitored fiscal policies ( higher VAT, lower spending ?) aimed at producing a more balanced budget. The effect of this generosity wedded to a tough dose of fiscal conservatism on the other members of the Eurozone like Italy, Belgium and Spain would be salutary. For Frau Merkel (who will ultimately sign the cheque ) linking the bail out to strict terms will go down well ahead of Septembers elections with a German public that is increasingly dismayed at the cost of Euro membership.The political ramifications of a conservative bailout on a wayward financial centre like Dublin would make life very lonely for Gordon Brown and Sterling - a point which may be viewed positively by the bureaucrats in Berlin and Paris.
Showing posts with label ECB. Show all posts
Showing posts with label ECB. Show all posts
Sunday, March 15, 2009
Sunday, February 15, 2009
What if?
Weekend press coverage of the economy in the UK was decidedly mediocre. One journalist said it was time to consider stocking up with foodstuffs and buying a gun ahead of the breakdown of law and order. In the same paper another writer was saying that small caps would provide superior returns in 2009.
It seems to me that the City has failed to raise its commentary game to address the severity and speed of the proto-recession - there is still far too much standard thinking. I would like to see some fresh thinking about the possible structural market impact of political banana skins that are being thrown out by the current economic downturn and the series of uncoordinated government and half baked responses to it. What would happen to currencies , equities and fixed income markets if one of the following was to play out ?:
What if Israel decides that the US administration is fixated on the economy and ignoring the threat posed by Iran? Will a new government in Jerusalem take the view that Iran is close to developing a workable nuclear warhead and attack Teheran's nuclear facilities? The recent election results seem to have boosted the hawks. Where would oil trade? Would the economic and psychological benefits of the stimulus be choked off leading to a second major leg of the downturn?
The lack of policy response at the weekend G7 meeting in Rome shows that the market state is dead. What will replace the political consensus of the last 60 years in the UK? Socialist safety net, Thatcherite austerity or something new? What does this mean for equities - will higher tax rates of say 60% on income slow corporate growth or will new high margin and strengthened corporate entities emerge to drive market valuations?
What if Ireland defaults (see previous posts)? Will the ECB bail them out or will German voters surprise us all and say no to their government and no to bail outs for the other PIIGS - what would the ECB do then? Would the Euro survive the withdrawal of its key economy? 49% of Germans want a return of the Deutsche Mark according to the latest polls.
Clearly government austerity is on the cards for the UK. Will the UK be forced into a major reduction of defence spending? If Trident is cancelled will the UK have any justification for retaining a seat on the UN security council?
What if Russian foreign policy continues to trend towards nationalist goals? Will Moscow use the economic crisis to destabilize Ukraine in the belief that gas hungry Germany and Italy will prevent any concerted action against it?
It seems to me that the City has failed to raise its commentary game to address the severity and speed of the proto-recession - there is still far too much standard thinking. I would like to see some fresh thinking about the possible structural market impact of political banana skins that are being thrown out by the current economic downturn and the series of uncoordinated government and half baked responses to it. What would happen to currencies , equities and fixed income markets if one of the following was to play out ?:
What if Israel decides that the US administration is fixated on the economy and ignoring the threat posed by Iran? Will a new government in Jerusalem take the view that Iran is close to developing a workable nuclear warhead and attack Teheran's nuclear facilities? The recent election results seem to have boosted the hawks. Where would oil trade? Would the economic and psychological benefits of the stimulus be choked off leading to a second major leg of the downturn?
The lack of policy response at the weekend G7 meeting in Rome shows that the market state is dead. What will replace the political consensus of the last 60 years in the UK? Socialist safety net, Thatcherite austerity or something new? What does this mean for equities - will higher tax rates of say 60% on income slow corporate growth or will new high margin and strengthened corporate entities emerge to drive market valuations?
What if Ireland defaults (see previous posts)? Will the ECB bail them out or will German voters surprise us all and say no to their government and no to bail outs for the other PIIGS - what would the ECB do then? Would the Euro survive the withdrawal of its key economy? 49% of Germans want a return of the Deutsche Mark according to the latest polls.
Clearly government austerity is on the cards for the UK. Will the UK be forced into a major reduction of defence spending? If Trident is cancelled will the UK have any justification for retaining a seat on the UN security council?
What if Russian foreign policy continues to trend towards nationalist goals? Will Moscow use the economic crisis to destabilize Ukraine in the belief that gas hungry Germany and Italy will prevent any concerted action against it?
Thursday, January 22, 2009
Central Europe and Geithner
Impressed with what I saw of Tim Geithner's testimony to the Senate committee considering his nomination but horrified at the self absorption and superficiality of many of the legislators questioning him. One Senator wanted one word yes or no answers to complex matters of regulatory change - talk about grandstanding!
FT picks up on the excessive lending given by Austrian and Italian banks through their Central and Eastern European subsidiaries. Providing Swiss Franc mortgages to Hungarian Forint earners and assets was never going to be triple A rated. Rather than take the hit on their own balance sheets ( which the banks can't weather and which would drive them into government ownership ) the Austrian and Italian banks are now asking for crisis funds for the region from the ECB .
FT picks up on the excessive lending given by Austrian and Italian banks through their Central and Eastern European subsidiaries. Providing Swiss Franc mortgages to Hungarian Forint earners and assets was never going to be triple A rated. Rather than take the hit on their own balance sheets ( which the banks can't weather and which would drive them into government ownership ) the Austrian and Italian banks are now asking for crisis funds for the region from the ECB .
Wednesday, January 21, 2009
Why would the ECB want the UK to join the Euro?
Sentiment on the trading and research desks of the big City firms is as dire as I've ever known it. The creeping realisation that the salary component of the remuneration package is likely to be larger than the bonus element isn't helping.Prop desks in many houses have had their hands tied and are ticking over at 10% of summer levels.
Lot's of talk about nationalisation of the banks, sterling at parity with the greenback, and a reduction in national installed capacity of 10%-15%. Some pundits are beginning to say the unthinkable that the UK will need to join the Euro. Question is why would the Europeans let us ? Entry would probably be at around £= 70/75 euro cents to make sense and that would only serve to boost UK competitiveness, and attract FDI into the UK from the rest of Europe. Whatever the outcome the UK government is at some stage going to have to address government spending with particular focus onpublic sector pensions. President Sarkozy remains convinced that the UK will have to come cap in hand to their European neighbours by the fall at the latest - the alternative being an IMF bailout. There's going to be plenty of fun ahead in the currency markets!
Lot's of talk about nationalisation of the banks, sterling at parity with the greenback, and a reduction in national installed capacity of 10%-15%. Some pundits are beginning to say the unthinkable that the UK will need to join the Euro. Question is why would the Europeans let us ? Entry would probably be at around £= 70/75 euro cents to make sense and that would only serve to boost UK competitiveness, and attract FDI into the UK from the rest of Europe. Whatever the outcome the UK government is at some stage going to have to address government spending with particular focus onpublic sector pensions. President Sarkozy remains convinced that the UK will have to come cap in hand to their European neighbours by the fall at the latest - the alternative being an IMF bailout. There's going to be plenty of fun ahead in the currency markets!
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