One cross each

Mint – Blain’s Morning Porridge

Crucifixion? Out the door, line on the left, one cross each…

Markets are settling uncomfortably into a post-Brexit (British exit from the European Union)dystopia. Rumours abound of crashing business expectations and culls of bankers. But, unlike the continuing hurly-burly of the political world, here on the trading floor we’ve pretty much gone through all the eight stages of Brexit: Shock, Denial, Anger, Bargaining, Depression, Applying for an Irish passport, Acceptance.. and finally Hope that it might not matter anyway. 

Markets are now focused back on likely outcomes – like what happens next and how will it roil markets? How does each political ambush or dirty trick move the gilt yield or the FTSE?

But focusing on the details may be dangerous. I fear we may be missing the wood for the trees. I suspect the Brexit farrago has loaded up additional asymmetrical risks to stability on top of the already abnormal perversity of the current markets.

Let me translate what I mean by that: with bond yields pressing lower and lower, the distortion effects across markets – which were already utterly distorted following years of QE (quantitative easing) and monetary experimentation – could yet become chaotic. Chaos in markets occurs when prices break though expected “paths” in terms of expected supports, and become utterly unpredictable.

That will throw up all kinds of challenges and tests for the authorities – and while the ECB has repeatedly proved itself able to meet these over the past few years.. I am worried who will be minding the shop back here in Blighty? Although the initial Brexit crisis appears to have been weathered, I wonder if the real storm is still over the horizon?

Why? Although we seem to have stability, the moves of the last few weeks illustrate the underlying pressure. At what stage do bond yields capitulate and what would be knocked over in its wake? It feels like something has to give...but what and when?     

As bond yields stay stubbornly low – thus inflating the value of stocks due to the hunt for returns - I’m wondering if we’re missing something in terms of the increased volatility of the currency markets? Liquidity has deteriorated across bond markets, forcing folk to look for more liquid markets to game. And currency is the obvious one.

This morning we’ve got rating agency Standard & Poor's saying the UK will avoid recession for the next two years because of the weaker pound. They say devaluation is a shock absorber that will stimulate exports and make the country more attractive. Sure, that is true, if it stays that way...but...increased currency ructions not only create angst across central banks and government, but could also be a symptom of greater uncertainty across markets. 

And on that theme...another great morning for Italian Banks as Monte dei Paschi di Siena takes another massive stumble. I am still moderately concerned the trigger for a full-scale crisis may come from European banking. What is an Italian crisis today could well engulf others if the impression is created it can’t be addressed. Watch European bank stocks very carefully.

Another factor of dislocated markets is the UK property market – all the clever talking heads said UK property prices would crash following Brexit. Sure enough Standard Life has suspended redemptions on its property fund. Is UK property really so risky in a country massively short of housing? The fact we’re threatening to close our borders to further immigration merely slows the growth of the housing shortage, and won’t reduce it.

While a collapse in commercial property highlights business uncertainty, the retail housing market should still be one to like on the very simple basis that demand is demonstrably greater than supply! 

Back to the day job…

Bill Blain

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