What a difference

Mint – Blain’s Morning Porridge

 What a difference a few weeks makes.

We were blithely guided to expect Federal Reserve Chairwoman Janet announcing another rate hike in the wake of a strengthening global economy and US growth. This morning we’re waiting for quantitative easing infinity from a phalanx of central banks, more drama from Japan, the Bank of England to maybe start mumble-swerve about easing, and definitely nothing from the Fed.

Underlying the mood is a frazzled market on the edge of flight over next week’s Brexit vote which is being hailed as the end of absolutely everything. On Monday bund yields doubled (from 0.01% to 0.02%) only to rally 200% to zero yesterday! OMG. Gilt yields at record lows! Don’t get trampled in the flight to quality…

There is a great disturbance in the Force.

Much negativity out there I see...I’m told fund cash levels are close to millennial highs at over 5.7% cash (says Merrill) – a clear confirmation of recessionary expectations. VIX (the volatility index) has climbed to its highest level in months. The outlook is horrible. European bank stocks are crashing on fears zero rates will slaughter them and a deeper European recession will simply crystalise their already dangerous NPL (non-performing loan) weaknesses. European insurers are scrabbling around to figure how they survive in a zero rate recession and cover their long-term liabilities. No wonder the markets feel in near panic.

Relax. Times like this are when it all spins around… suddenly. In a few weeks’ time the vote will be a distant memory and fund managers will be wondering what to do with that cash – clue: bonds aren’t going to the place…But, the next few days will be “interesting…”

There is a far-fetched and unlikely story a crack team of Brussels insiders is hatching up a “new deal” for Britain to be dropped on London just in time to save the vote. (It must be true – it’s in the Gruniard..comedy name for The Guardian newspaper, based on its perceived fondness for typoes and misprints) Brussels will apparently offer to surrender much to the UK, and give us optionality on all kinds of stuff… apparently. The bit that gave it away is the promise to make David Cameron look statesmanlike.. please.. It’s such an utterly crass and unlikely tale.. that it might just be true.

More sensible is the likely leakage of a massive central bank support offensive to stabilise the market should next week’s exit momentum prove unstoppable. My colleague on BGC’s Money Market desk – Kevin Humphreys (a chap who knows about these things) reckons the European Central Bank and BOE are all over the potential crisis and banks like the proverbial cheap suit.

Moreover, an increasing number of smart money investors no longer see the UK’s exit as a UK problem. There is a growing consensus that Europe is Europe’s Problem. (Thanks to the Porridge readers who sent me one blog yesterday which lifted verbatim my comments from Monday on the potential of a “Buy UK, Sell Europe” moment.)

Plus, the fact other markets are shrugging off the negativity is positive – for instance, the fact the index firm MSCI decided not to include China domestic stocks was shrugged off by the market..

So… it's going to be massive fun the next few days.. We’ll be here on the desk.. watching, waiting… and probably dozing. As always there are parallels to sailing. When we know a squall is coming we shorten sail, tie everything down, get our oilskins on, and get ready. Nine times of out 10 the squall never hits. It’s almost a rule the shocks you expect and prepare for never happen. It’s the unexpected ones that get ya every time.. So there we are with reefed sails, the boat prepped for a gale, and suddenly we run aground, tumble overboard and get eaten by sharks..

Or something like that… 

Out of time.. and a day job to do..

Bill Blain

Mint Partners

44 207 786 3877