Mint – Blain’s Morning Porridge
If you don’t like a Chateau Margaux, he told an American audience, spit it out.
Well.. that was an interesting European Central Bank meeting. On the face of it, another polished performance by the great communicator. But what was Draghi’s underlying message? Telling the Germans to butt out, push for growth, and asking markets for more time? The problem is the market perceives a/the policy gulf twixt Berlin and Frankfurt and will assume the worst – which becomes a self-fulfilling prophecy.
But first, the key issues for the bond market were what qualifies for the corporate bond purchase programme: euro-denominated, investment grade by S&P, Moody's, Fitch of DBRS (I’ll come back to that below), six months – 30 years, insurers and non-banks are eligible, banks are not. Issuers must be incorporated in euro area, but the ultimate parent need not. Ok.. we get that.. place your bets accordingly..
Sure, the ECB will keep buying everything, and jobs, growth, and happiness will flow in its wake. Doubters will be silenced.
Er...no. Draghi has to deal with a growing Schauble-riven credibility gap – which is a shame, because he’s been a brilliant player for the ECB. He’s pulled multiple rabbits out of the hat and saved the euro twice before breakfast on many occasions. But, for how much longer? There is a log-jam of challenges coming down the river. Will the market buy Draghi’s plaintiff cries of: “The policies are working. They are effective. Just give them time..”
Sadly, I’m not convinced the policies can work. Inflation ain’t moving and growth won’t happen. The transmission mechanism – European banks – remains profoundly pants and dysfunctional. The Germans are right about one thing – Europe desperately needs economic and structural reform before there is any chance of meaningful growth. Parallels to Japan I’m afraid. But the reform agenda, and the consequences of austerity to enforce it, are known known problems. Monetary policy is not a substitute for reform.
Meanwhile, the known unknowns are the host of potential threats facing Europe. Brexit (British exit from the European Union) is the obvious one. How many other wavering European states will follow? Add refugees, Greece and the rest to the mix.
But the first problem might be easy to solve. If DBRS were to downgrade Portugal next week, then it would be junk across the board, and therefore off the ECB’s quantitative easing list. A number of analysts predict that will cause Portugal yields to gap out – as the ECB is effectively the only buyer. And that would trigger all kinds of contagion and doubt across the Eurozone, and potentially even trigger a Target 2 “event”. A downgrade looks on the cards based on Portugal’s unfixable debt metrics, the slowing economy and weak data, and the unstable political situation.
(As my colleague Richard noted after to trips to Italy and Portugal – Portugal at least looks like things are happening – Italy is asleep.)
But of course it’s not going to happen. There will be no problem. There is not going to be a Portugal debt crisis next week, because there is not going to a downgrade. Is there?, asks Mr Schauble meaningfully..
Enough Yoorp (Europe).. what else is going on?
In Japan the Bank of Japan is seriously considering paying financial institutions to borrow money from it. Fantastic say the central bankers – that will stimulate lending. Nonsense, say the banks. It will put further pressure on their margins.
Back on Planet Earth, my stockpicking colleague Steve Previs reminds me “Sell in May” is only a week away. He’s worried the entrails of the markets he diligently studies tell him the sell-off might start a few days early..
Meanwhile.. Even as it threatens to snow on this weekend’s London marathon, the summer season is nearly upon us. I’m just planning my Friday sailing events – more info next week on Fridays in June, July and September.
Our big event will be Mint Polo in the Park from June 3-5. We’re hosting clients at this prestige Polo event. It's great fun. For compliance purposes it’s a £25 per person event (food and drink) – so even the most gimlet-eyed corporate regulator can’t whine. I’ll be there on the Friday. If you fancy either the Friday or the weekend, do let me know as soon as possible – spaces will be very limited.
Back to the day job.. and have a great weekend..
Bill Blain
Mint Partners
44 207 786 3877
