If it was raining brains,

Mint – Blain’s Morning Porridge  - February 18 2014

If it was raining brains, Roxy Robinson wouldn’t even get wet...

Some folk were telling me yesterday it felt like markets are in limbo – but we may be on the cusp of another very interesting phase of play. Activity was bound to be thin with the start of half-term school holidays in the UK and the US out on holiday, but a powerful Nikkei rally this morning on the back of BOJ action could herald another phase of policy-driven positivism!

The January correction now looks played out – the crossover is at record levels! Can the positive vibe continue? I’m going to go with my macro colleague Martin Malone this morning and look for further upside in terms of policy driven positives.

These includes the Toluca meeting in Mexico tomorrow with the US, Canada and Mexico meeting to turbocharge NAFTA’s 20th birthday – with energy headlining the discussions. This weekend’s G20 communique is probably already written and will talk about global growth strategies – answering many of the questions posed by the Bank of India chief Rajan last month when he whined about the Fed letting down emerging markets.

Then we have Pacific TPP trade discussions in Singapore – many think that deal is dead, but it would rather suit the new global growth mood. It’s potentially the biggest surprise factor for markets this quarter.

All these are potential growth multipliers – we reckon TPP could add up to 100 basis points to toglobal growth. If it happens, markets will be slow on the uptake, but it could fuel another round of  big gains – Not saying it will definitely happen, but you’d do well to be prepared. If you’d like a fuller analysis on these three meetings – give us a shout. Martin has produced a rather excellent note on the critical policy moments. Give me a shout if you’d like a copy.

But, on the downside...you know something must be obviously wrong when the BBC’s Robert Peston is fuelling the China debate with his tuppenceworth. I’ll make a point of watching his programme “How China Fooled the World” tonight on BBC2. Love him or not Peston does have a habit of getting the story – and he’s predicting the third wave of the global financial crisis. His thesis is simple – China’s spending binge is going to end badly. 

Hints of these concerns this morning as the People’s Bank of China drains liquidity from the Chinese money markets to calm an unrestrained bout of New Year lending. Difficult call for China – support growth to keep the country calm, or rein back spending to prevent the bubble bursting, the gentle deflation approach.   

And what’s really going on in Japan? A run of profoundly disturbing data, strongly hinting that Abeonomics isn’t working, finally got the BoJ pushing the policy buttons this morning. The BOJ doubled an expiring loan facility to Yen 7 trillion to give banks 0.1% money and extended the maturity to four years. Together with super QE, the plan is to flood the economy with easy cash.

But will Abeonomics work, or are we on the road to Abegeddon? The three arrows of easy money, fiscal stimulus and reform have thus far failed to tickle demand across the economy from borrowers or consumers. What happens when you throw a party and no-one comes? Low growth (less than half expections)? Even inflation seems to have peaked at 1.3%?

What’s the outlook? It takes time to turn around a supertanker, and even longer to overcome consensus-bound thinking – which seems to one of the major problems facing Japan. How long does it take for corporates to adjust to the opportunities of a weaker currency, rather than simply defending against the problems it creates. Where exports are up, it's not reflected in higher consumer spending – companies treating gains as one-off windfalls. The imposition of sales tax also holds back plans. It’s a mixed picture at best.

So… an interesting few days in prospect. Focus on the big picture.

Out of time..

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

 

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