Round up the usual suspects…

Mint – Bill Blain’s Morning Porridge  - March 21 2013

This morning… European Auctions, new era for Nikkei and Yen, Cyprus and UK housing market.

It might be the first day of spring, but it’s still as cold as the proverbial witch’s bits waiting for a train. No surprise Cyprus still dominates the blogosphere this morning. They are going to nationalise (ie raid) the state pension pot, securitise gas reserves, tinker with the deposit tax plans and whatever. They appear set on collision course with EU and possibly Russia as well -  negotiating genius it’s not. No-one is coming out of this well. On the other hand, the problems of a small little island at the unfashionable end of the Middle Sea don’t amount to a whole hill of beans.. 

Flash PMIs today so European auctions are going to be significant – while they should go well, it does feel Spain and Italy are settling around current levels (which are still long-term historically tight to spreads over Germany pre-euro). More interesting will be France where the mounting problems for the government – confidence vote and ministerial scandal hint at France becoming a festering sore in months to come. We still expect to see a step-change in the France/German spread.

In Japan we're waiting to see how aggressive the next down-leg on Yen will be as the new BoJ governor and team take centre stage – for now it remains about the Nikkei. The UK budget opens a whole number of worm tins, but makes clear BoE will have a new mandate. Tinkering with taxes does not turn round the UK’s miserable looking economy.

Back to the posterior of the Middle Sea. Markets have quite properly discounted immediate Cyprus threats on the basis the quantum is too small. However, from small things rise mighty problems. The biggest issue remains euro credibility - credibility is not cheap nor is it infinite. It’s been a complete clusterfeth on a number of levels and is riddled with inconsistencies:

i)              The fractured nature of European politics – the euro elites at the centre underestimating how frontline domestic politics will play out. Pause for a moment to think about German elections later this year and check your life-jacket.

ii)             The damage done to banking confidence – the word is don’t worry about other banks as Cyprus is a “unique situation”.. but why run that risk. (That reminds me.. euro Basel III nonsense to look at..)

iii)            Future risks: what happens to European credibility if Cyprus does walk from the euro, or banks go bust, or Cyprus defaults? Assuming it won’t happen isn’t the same as planning for all eventualities. I fear another round of seat of the pants “do anything promises” may not work next time.

On the other hand, let’s think about Cyprus paper - is it worth buying the Cyprus 13s? Who knows, my guesses will be as good as anyone else’s. The bonds have cheapened up considerably in recent days (but look on the rise again). On the plus side we know Europe wants a solution, but Cyprus surprised them by saying no. It now looks like a toss-up whether a new euro or Russian solution emerges.

What do you think about buying the Cypus 13s with a 67% yield to June maturity? Will they pay or won’t they? It’s a bet in the efficacy of Troika’s solution-making abilities.  Or, might it be better for Europe if Cyprus sinks? How about that for a dramatic lesson in the consequences of not doing what the euro elites say? A schweet signal to deliver to Italy, Spain et al.. “Do what we say, or we walk away”.

Watching a Cypriot default, bank debacle and subsequent pillage by Russia from a gas for aid deal would concentrate the minds of European politicians across the Med wonderfully. Enough speculation about Cyprus.

When I was studying economics one truism was how property-dependent the UK economy has historically been - post-war booms triggered by housebuilding - and it’s brutally clear consumer economic sentiment dances to the tune played by rising house prices. Chancellor Osborne's tinkering with the property market by stimulating buyers in yesterday's UK budget is unlikely to end well - the creation of false asset bubbles (like US subprime) etc etc...

Housing markets generate their own pond life. The glory days of the 1980s and 90s boom and the hyperbole of comic-book estate agents should never be forgotten. My recent experiences suggest London estate agents are still "testing the envelope" in terms of the way they do business - so it’s interesting to see one "reputationally challenged" firm about to IPO. A sure sign of coming frothy UK home market.

And what will a frothy UK housing market do: encourage people into property, drive consumer spending, increase personal debt levels and result in a financial crisis few years down the road? Marvellous..

Out of time..

Bill Blain

0207 786 3877

[email protected]

[email protected]