Brian Bollen's Blog

The most dangerous of all falsehoods

Mint – Blain’s Morning Porridge  - May 30 2013

The most dangerous of all falsehoods is a slightly distorted truth...

It’s getting messy out there as the Nikkei tumbles a further 5%. The streets of Mayfair are awash with hedge fund blood, and many will be wishing May was something that only happened to other people. It really has been one of the worst months for the bond market in many a year. On the plus side, May is nearly over. But...it’s not over yet.  

One suspects a degree of overreaction going on.. Can someone explain why Toyota is down 4%+ when only 15% of its revenues are Japanese?  I can understand the weakness in property and banks. Hey-ho. Kuroda was in the Japanese parliament this morning arguing the cumulative effects of BoJ bond purchases haven’t yet taken hold – pleading for time. But confidence is a fickle factor.

The [ ] situation has developed

Mint – Blain’s Morning Porridge  - May 29 2013

The [ ] situation has developed not necessarily to Japan's advantage...

These are not easy times for the global bond market. We’re looking at the US treasuries market (more below), and reckon this morning’s 10-year spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further.

It’s only partly based on the better economic outlook and fears of the QE taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”. Forget the stories Japan banks were buyers at the wides...that’s wishful thinking from treasury holders long and wrong on the US bond market.

Meanwhile, my Tech Chart Expert, Graham Joy points out some interesting data – “Dow 20 for 20 Turbo Tuesdays: up 11% on the year, but without Tuesdays would be only 0.2%!.. 20 Tuesdays in a row since January 25!   

No QE Scale Back: Coutts

By Alan Higgins, Chief Investment Officer, UK, Coutts

Despite some conflicting signals from Federal Reserve (Fed) officials last week, we remain confident that quantitative easing (QE, or asset purchases) won’t be scaled back in the US in the months ahead, and the risks are still skewed more towards the need for an expansion. This should support equity markets and other risk assets.

Equities initially reacted badly to comments from Fed Chairman Ben Bernanke suggesting the possibility of tapering QE purchases in the months ahead. But Bernanke attached an important caveat to that possibility – there must first be confirmation of a strong and sustainable improvement in the job market, something the Fed chairman made clear was not yet the case.

Overall, comments from Bernanke and other Fed officials did little to dissuade us from the view that prospects for QE tapering in the months ahead are greatly exaggerated. If deflationary pressures persist, market expectations may need to completely reverse towards potential QE expansion.

We believe Fed policy will continue to support equities and risk assets in general in the months ahead. 


Bonds | Treasury angst brings opportunity to hedge 


Yields on 10-year US Treasuries spiked above 2% (prices fell) amid concern that minutes from the latest Fed meeting were at odds with Congressional testimony of its Chairman Ben Bernanke on the same day.

The minutes showed a number of officials could be willing to reduce the $85bn a month pace of QE as early as their June meeting. But though Bernanke said a scaling back was possible within the “next few meetings”, he concluded that the job market remains weak and warned that “premature tightening” could threaten the economic recovery. 


With inflation falling, we don’t see QE being tapered near term, and expect 10-year Treasury yields to remain in the 1.6-2.0% range. Current weakness could be an opportunity to add Treasuries as a hedge against a correction in riskier assets, which have been on a roll so far this year.

Commodities | ETF selling keeps gold under pressure

Central-bank buying continues to support the gold price, with data from the International Monetary Fund showing both Russia and Kazakhstan bought gold for the seventh straight month in April.

Other buyers of physical gold have emerged on dips, particularly jewellery-related buying from India and China. The headwind remains selling by exchange-traded funds (ETFs), which has continued incessantly since last November, and has averaged daily sales of around 1.5% of outstanding funds in recent weeks.

Gold holdings in ETFs have fallen by almost 4m ounces (oz) in May, which compares with the 5.6m oz that coincided with April’s steep selloff.

Despite support by physical demand, it looks like the steady flow of selling by investors will keep gold under pressure. Although many of the risks that had driven demand for gold as a hedge have diminished, we still think gold has a valuable role to play in portfolios, particularly to mitigate the still-present risk of a sharp correction in equities and the continuing devaluation of major currencies through QE. We believe that gold will remain in a trading range between $1,360 and $1,480 per ounce.

Currencies | Yen weakness to go on at slower pace

Although modest compared with the selloff in Japanese equities, last week’s volatility spilled over into the yen. After reaching a new multi-year high around 103.7 yen, the dollar reversed to 101 as the Nikkei plummeted, before regaining some lost ground to end the week around 102.

Despite this setback, the dollar is still trending higher and is somewhat ahead of our forecasts for a move to around 104 yen by the end of the year. Risks to our forecasts are probably skewed to the upside, but last week’s move reinforces our view that yen weakening from here is likely to be less dramatic.

That’s fully in line with comments from senior Japanese policymakers that further sharp yen depreciation could create problems of its own.

 

No Single Great Rotation: Schroders

At Schroders' first Thought Leadership Live interactive debate hosted in London, a panel of senior investors and experts explored the much-vaunted theory of the ‘Great Rotation’.  

Panellists Peter Harrison, Schroders Global Head of Equities, Philippe Lespinard, Schroders Co-Head of Fixed Income, Alan Brown, Senior Adviser and former CIO of Schroders, and our guest panellist and funds industry expert Diana Mackay debated the Great Rotation theme and looked at some of the key current market themes.

The overwhelming view from the panel was that there is no single Great Rotation happening but that several smaller, more subtle, rotations are underway. 

Consensus is the process of abandoning belief...

Mint – Blain’s Morning Porridge  - May 28 2013

Consensus is the process of abandoning belief, principles, values and polices – something in which no-one believes, but to which no-one objects...

Nikkei correction – first positive day for a while this morning – and the yen back to 102. Europe opening higher, and my continental buddies saying the market is looking more constructive. But how secure is it all?

As we approach month end, uncertainty feels the only certainty.  Strip out the noise, and the trend remains towards normalisation – whatever that might mean! New normal low growth, or resumed global growth? That’s tomorrow. Today the markets still feel wobbly  – struggling with the implications and timing of the US QE Taper, and last week’s correction to the Nikkei, the Yen and confusion as to what next -  collectively raising stress levels. 

It’s a bit like a stormy ocean: on the surface we have very mixed economic signals and political headwinds, and the threat of reversals, battering market sentiment. However, the underlying direction of the economic current is probably stronger than we currently perceive.

In Europe, the implications of stronger than expected German IFO numbers, hinting at little chance of further ECB easing, claims austerity is/isn’t over/working, and the ongoing political crisis developing between Spain and the regions, are all cited as sources of instability.

And S&P is warning France they can’t just ignore the need for budget cuts! It’s just ongoing European noise. The determination to secure the eurozone, (whatever the “adjustment costs”) and the ability of the ECB to find a back door route to keep the dosh flowing should not be underestimated. Cheap peripheral debt will remain enticing.

But the biggest story remains Japan. Despite what many commentators are predicting, Japan is not about to implode in a cataclysm of debt. Give it time – time for the current economic sea-change to take effect. At the moment everyone is reading too much Kyle Bass and concluding the nation is about to sink in 80% of government revenues simply servicing debt, currency wars, and the inevitable consequences of demographics. All important issues, but all long-term addressable (as all Malthusian nonsense usually is!)!

So get over the shock-jock stuff. Japan is Ian economy that makes thing the world buys. It controls its own printing presses. But it does seem to suffer from an-depth confidence/leadership problem, and political players with a genetic predisposition to shooting themselves in the foot! Bottom line is the Japanese worship of consensus and face is a potential credibility timebomb!

Abeonomics changed some of the drivers .. and the Kuroda inflationary shock was supposed to utterly change the game. Instead, it would appear that half-way through the opening moves of the reflationary game changer – ie kick-start the economy with an export-led growth spurt, alongside low rates and a programme of reconstruction and economic boosting policies like increasing the work force by making it easier for Japanese women to return to work - suddenly feeble Japan technocrats are worming backwards, worried about consensus and losing face.

The mixed messages we’re getting from within the BoJ and elsewhere are damaging credibility. When some numpty from within the BOJ says “maybe markets are confused” he’s demonstrating the ignorance of consensus. Investors aren't confused – they understand the implications of the Kuroda bombshell, but are pulling back because it looks like the Japanese don’t! That’s a problem. You can’t pull on the breaks when you are committed to driving down an icy ski slope at full speed!

Give the markets a few more days, wait for inevitable Japanese retractions and “explanations”, and we’ll see what happens. That’s not to say the ongoing volatility of the JGB market isn’t a serious crisis. Watch that space.

Meanwhile… with another holiday week in prospect it feels like a quiet one. For any clients not doing anything vital on Friday, I’ve still got a space on the first Mint Sailing Day (out of Hamble, Hampshire near Southampton). Call or email for details.

Out of time.

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

Winter is Coming…

Mint – Blain’s Porridge  - QUE PASA?  May 23 2013: Supplemental

Winter is Coming…

As I look out the window on a full blown blizzard and check the date...some observations on the markets before I go off to face a cross-channel storm tomorrow.

You could argue the current market is a technical correction. That nothing has really changed and central bank pressure will continue to fuel the global ease, thus there will be renewed stock and bond upside.

You could argue we have the new reality of a confidence crash in central banks alongside the bad news on China's economy. That’s about blown central bank credibility – triggered by the mixed message from Bernanke yesterday, and Kuroda’s inaction and confusion the day before. You can’t unsay what’s been said. No amount of bond buying one day makes up for the lack of it the day before. If you look confused on the bond market you claim to control...you are toast – and if Kuroda has lost the confidence of the market...toast it is.

Or you could argue it’s all about markets being overextended and correcting – following a suspension of disbelief that caused all asset markets to get excessively bubbly. The expression “irrational exuberance” has seldom been so apt.

Markets were clearly uneasy at the start of this week. Now they are outright spooked. Attention is now far more focused on issues like how the taper plays out (hence the focus on real markets like US mortgages) and doubts on whether the BOJ can control JGBs. Expect the mood to remain fractious and suspicious in coming days.

It may take more than a few days for the Nikkei jolt to work through. The big global ease has been at the centre of investment thinking, with Japan as the central point, for months. With that thesis fractured, it may take investment committees some time to refocus and redirect strategies. Look at the massive open interest in the Nikkei – it looks like a chaotic breakout. 

A critical effect of a suspicious market will be to refocus attention on risk. Expect ructions across credit. Look at how European peripheral spreads are widening – the bottom line is the market is relearning the lesson that Italy and Spain risk is significantly higher than Germany.

Basically, we’ve been on the big global ease theme for the last six months. It drove and fuelled all assets. Now that trend may have changed. I suspect coming months will be about the search for real value, and that process will expose individual stories as hollow. For instance look at a well known Japan electronics maker moving from 800 to 2300 on the back of one decent new product and lots of tosh. Or Italian banks or…peripheral covered bonds getting spanked because the underlying collateral is pants. Choose a market and I will show you bond or stock to sell. Panic mode in euro swaps.

And what about new issues – well the Ukrainian Chicken Farm Moment has occurred? Folk will be looking at some of the tight dross they’ve recently been force fed by new issue banks and wondering what they were smoking…

could be the old “Sell In May and Stay Away till St-Legers Day” adage yet comes true!

HOWEVER, with the big beasts of the bond market (I mean folk like Mr Gross), saying the global economy has become a massive bubble inflated by central bank action, then perhaps letting some of the air out the bubble now before it bursts is a smart move. 

So…how to play this. Liquidity is going to “scarce” in coming days, and play the rules: a bid is a bid is a bid and if you get one, hit it harder and faster than you would the proverbial red-headed stepchild. And think about hedging or playing in futures and options. We already completed some high-yield hedges with ETFs, but they may be tougher in coming days.  

Nothing happens without a reason.

And on that happy note…tomorrow I race from Cowes to Deauville and the weather looks as pants as the market.

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

If there is nothing wrong with me,

Mint – Blain’s Late grab a slice of Morning Porridge  - May 23 2013

If there is nothing wrong with me, maybe there’s something wrong with the universe?

Thanks Ben. I’m just back from a breakfast client meeting having been told I was a complete “rude-word“ in my recent calls for the global ease to trigger another bond rally. Ben’s out the ether comment about ending QE in the next few meetings triggers a massive bond and stock reversal.

Please. Get Real!

Having had over an hour to contemplate their comments on the tube back from Green Park, (yes, it takes longer to go three miles on the Underground than it takes to get from Southampton to Waterloo!), my only comment is the global economy is just like the Tube system – it ain’t going nowhere fast!

Is it better for a man to have chosen evil than to have good imposed upon him?

Mint – Blain’s Morning Porridge  - May 22 2013

Is it better for a man to have chosen evil than to have good imposed upon him?

And the big news this morning is the limited news from Japan. The BoJ said it was maintaining its base-doubling easing programme, observed positive economic improvements, but added nothing new to the programme. Asian stocks are up, the Nikkei is up, but JGB yields remain excessively high...which may bode ill for the bond market in next few sessions.

Going back to our predictions of another leg-up rally for bond markets - a continuation of the global QE ease - the lack of a further BoJ boost (which was always unlikely - they're taking the stance they’ve done enough and need to watch the effects), is a negative omission, but it only pushes back our time frame. Keep your buying boots close though...the moment a bond rout becomes a buying opportunity is short and fleeting.

Negative Impact? You just blew up the Chrysler Building!

Mint – Blain’s Morning Porridge  - May 21 2013

Negative Impact? You just blew up the Chrysler Building!

Right.. let's say it: Put Your Fixed Income Buying Boots On! Yep, that’s a difficult call to make when markets feel so frothy and toppy, but I reckon there is at least one more leg-up for bonds coming. Discerning what’s driving the current financial rip-tides is difficult - but break it down to basics and it’s the same old, same old.

Bottom line is growth is more limited than markets have hoped for, the Global Ease/QE theme will continue. Its strength is underestimated at present, and the current soaraway global stocks may be on borrowed time.   

BNY Mellon CSD Signs T2S Agreement

BNY Mellon reports that it has signed a framework agreement with the Eurosystem to allow it to outsource settlement to the T2S settlement platform, which is set to go live in 2015.

The agreement commits Brussels-based BNY Mellon CSD SA/NV to taking all necessary steps to become a part of the T2S infrastructure and to comply with the T2S governance regime.

We are told that BNY Mellon CSD SA/NV will now work with the Eurosystem to implement the required IT infrastructure and connectivity to become a part of T2S. 

Nirvana: A Tour Diary, By Andy Bollen

My cousin Andrew (Andy) Bollen's book has just arrived from Amazon (Nirvana A Tour Diary; my life on the road with one of the greatest banks of all time; 278pp for £7.99).

I've had a quick flick through. Goodness me, the language!!! This son of a journalist knows how to write and conjures up atmosphere well.

I look forward to reading it properly on my next trip to Switzerland, and giving it a proper review. I'm not a Nirvana fan - couldn't identify one of their tracks if it served itself up in my soup - but after just skimming through a few pages feel I know a bit more about them already.

 

John Hurt In Doctor Who: Details Emerging

More details are emerging of the plans for John Hurt to play Dr Who. As an occasional writer of fiction myself, and a lifelong science fiction fan, I find it fascinating.

He will play an incarnation of The Doctor that we have never seen. We never saw Paul McGann's Doctor regenerate into Christopher Eccleston's. Turns out he didn't. Paul McGann regenerated into John Hurt, whose Doctor is now being slotted in between the McGann/Eccleston two. Hurt becomes the ninth Doctor, making Eccleston the 10th, David Tennant the 11th and Matt Smith the 12th.

Simple, isn't it?

Except, of course, that that creates a new issue that I began wondering about when I was about nine, and William Hartnell left the role, to be replaced by Patrick Troughton. They said at the time the Doctor could regenerate 12 times. That felt an awful lot back in 1966, but I did ask myself what they would once they reached that magic figure. Time to put the thinking caps on...

John Hurt As The Doctor: An Anomaly

I spend virtually my entire working life writing about obscure aspects of the international financial industry, occasionally receiving a compliment or two for specialising in writing articles that no-one else wants to. I don't complain. By and large, it pays the bills.

Currently, the most read page on www.brianbollen.com is a piece I wrote in reaction to the notice at the end of Dr Who on Saturday night, introducing John Hurt as The Doctor. Astonishingly, more people want to read that than about the centralised clearing of OTC derivatives. I can't quite work out why...

English Premier League: Tension Unbearable

So, this is it. Everything we've all been waiting for. The last day of the 2012-13 English 'Premier League' season, and there's everything to play for. The tension is unbearable. I've bitten my fingernails to the quick.

Who, I ask, scarcely able to breathe, is going to finish fourth?

Anyone else cracking under the strain? I think I might faint from the excitement.

Introducing John Hurt As The Doctor

Introducing John Hurt as The Doctor? I didn't see that coming, not even when he started speaking. Nor can I see where it's going to go. A one-off? Is there a regeneration planned for Matt Smith to jump ship?

They did something similar three or four years back, after David Tennant announced that he would be leaving the role, with an episode called The New Doctor or The Next Doctor. It was a huge tease, but was resolved well. I'll be tuning in on November 23 to find out.

Note that that is the 50th anniversary of the first ever episode broadcast. An Unearthly Child was shown while the world was struggling to come to terms with the assassination of John Fitzgerald Kennedy the day before. A strong cue for the Tardis to materialise in Dallas? On a grassy knoll? With John Hurt as the true assassin?

I wonder...

If it had been a cheese roll...

Mint – Blain’s Morning Porridge  - May 17 2013

If it had been a cheese roll, it would never have got past him…

I know where I’d rather be today...despite the menacing skies. And despite a few wobbles, including yet more disappointing US data, markets still have a vaguely constructive look to them. Doubts about what rising JGB yields might mean for global yield curves seem to be dormant. Equity markets look set to go higher. Lots of calls for further upside.

But looks can be deceiving. Under the surface, one can discern dark and menacing shapes circling.

Setting the tone is an excellent Gillian Tett article in the Pink'Un dissecting recent research suggesting the global wave of quantitative easing market repression is merely hiding and increasing the likely magnitude of bigger shocks down the road. (NSS!) My inbox is loaded with tomes on how frothy hi-yield/corporate/EM/peripheral debt is (delete where applicable).

Job Half Done?

Mint – Blain’s Morning Porridge  - May 16 2013

You won't have to put up with being called "the armchair squadron" much longer...

If there is a theme today, it’s the danger of a job half done...plus a potential case of the emperor's new clothes. As for the recent slew of data...don't cheer too early...one suspects the fat lady ain't sung yet! Steady, boys, steady.

Hooray and hurrah for Japan! Abenomics triumphs with solid growth in the export sector, and rising consumer confidence. Job done? Not even started. The interim data reawakens all the fears the Yen's recent slide is overdone, and that means the smart money has figured the risks the Nikkei is overbought. JGBs? A tiny flattening in the curve – but no signs yet of JGBs staging the rally we’d expect if the market was convinced Japan’s 7 trillion a month QE squared will work. (On the other hand, lots of analysts are pointing to real Japan yields being higher than bunds, treasuries or gilts. (What you might win on the JGB roundabout, you would quickly lose on the Yen swing!)) 

Falling Yen No Substitute For Reform

Simon Somerville, manager of the Jupiter Japan Income Fund and the Jupiter Japan Select (Sicav) Fund thinks a depreciating yen is no substitute for long-term structural reform.

For Professional Investors only, not for retail  

Simon Somerville, manager of the Jupiter Japan Income Fund and the Jupiter Japan Select (Sicav) Fund, says the magnitude of the yen’s decline should accelerate the turnaround in the Japanese economy but warns a depreciating currency is no substitute for long-term structural reform.

The tumbling yen may be reviving hopes of an export-led recovery for Japan but any sustainable improvement in the economy can only come from long-term structural reform, says Simon Somerville, manager of the Jupiter Japan Income Fund and the Jupiter Japan Select (Sicav) Fund.

European Recession Continues: Schroders

Azad Zangana, Schroders European economist, comments on the Eurozone GDP data announced today

“According to Eurostat, the initial estimate of Eurozone first quarter GDP is -0.2%, meaning that the monetary union in aggregate recorded its sixth consecutive quarter of recession (since Q3 2011). A combination of aggressive fiscal tightening, a crisis in peripheral sovereign bond markets, and a credit squeeze have all contributed to the ongoing decline. Although the fall in GDP was slightly worse than consensus estimates of -0.1% (Schroders forecast -0.2%), the pace of contraction has reduced from -0.6% at the end of 2012.

“Of the major countries that have reported their GDP, only Germany managed to eke out some positive growth, albeit just 0.1%. There are no detailed figures of the breakdown of GDP components yet for Germany, but the national statistics office (DESTATIS) reports that poor weather in the first quarter had an unusual impact on activity. The household sector is reported to have improved, while net trade did not make a negative contribution to growth as was the case at the end of 2012.

Tailwinds To Prevail As Recovery Continues: ING

ING IM believes that the headwinds of late will ultimately blow over with market anomalies set to find equilibrium over time. Looking at the common denominators of market movements in the past, its chief investment officer has identified two different forces. Monetary policy easing has been instrumental in inducing an upturn. Downturns have been mostly the result of a combination of increases in political risk or policy mistakes and idiosyncratic shocks.

Hans Stoter, CIO ING IM International, said: “We seem to be dealing with a set of persistent tailwinds, while the headwinds seem to be short-lived, now that central banks have reduced the systemic risk.