HSBC

So HSBC has decided to rebrand it's UK bank from HSBC to HSBC UK. And apparently they paid money to an agency to come up with that!

They considered reviving the name Midland from the bank they bought 20 years ago but it seems that they were worried it "lacked dynamism". Surely a supposedly ultra-safe ring-fenced retail bank isn't supposed to be dynamic. It's supposed to be a boring place which isn't going to lose your money. I'd have though Midland was the perfect name for it.

Volatility

Well it's been a bouncy couple of weeks but slowly a sense of calm seems to be returning to most markets. 2 months ago it was agreed the Chinese stock market was in a bubble, so quite why the bursting of that bubble came as such a shock I'm not sure. But the bigger question to my mind is quite why so many markets moved so far and so fast.  The FX liberalisation certainly didn't help - it was interpreted by many - probably incorrectly - as a devaluation and as such a sign that the Chinese economy is in dire straits. While I agree with the sentiment re the economy I don't think that they were aiming for a devaluation. Firstly there's the "face" involved in admitting your economy is so screwed you need to devalue, and secondly I just don't think they're that bright.

But back to the moves......  I believe there are 2 factors contributing to the violence of recent moves. Firstly - the typical illiquidity of August when half of the city's traders and fund managers are on the beach. And secondly I think the blame can be partly ascribed to the regulators and their wonderful new capital rules. 

Banks simply don't want to hold assets on their balance sheets. Inventories are kept to a minimum, and money is made on the buy/sell spread of put through rather than positioning. This is worse in the summer when the managers are away and the juniors are terrified of being left holding the baby in a falling or rising market. Thus when faced with a wave of buyers or sellers they will move prices far and fast in order to find keen buyers or sellers on the other side. To make matters worse, the new market makers are in many circumstances hedge funds. These guys are not worried about customer relations, or regulator oversight, so they can be as aggressive as they like in their pricing. Having prices gap higher or lower doesn't bother them, and they love volatility as it allows them to pick up very underpriced assets and sell very overpriced assets. They have little incentive to calm markets. Volatility is their friend.

I believe these factors apply in all markets, and the volatility in equities, bonds and commodities over the last few weeks can be largely attributed to that. Now that the banks few remaining big swingers are back at their desks, and hopefully have brought their trading balls with them, liquidity might start to return and the volatility of recent days will fade. If not regulators might need to rethink some of their new rules.

China - House of Cards?

As anyone who knows me will know, I've long been dubious on China. The numbers are too good, too consistent, too much "on target" and nowhere near volatile enough in a volatile word to be believable - too much like Bernie Madoff in fact.


So to me, the last few days news is not so much a shock as depressingly inevitable. The only real surprises are that the trigger was something as simple as currency liberation and that the moves were quite as violent as they have been, but with the benefit of hindsight the longer it took for the bubble to burst, the bigger the final bursting would be. The inherent contradictions of Communist party control of a supposedly free market capitalist system were bound to overwhelm the status quo at some point.

The more interesting question is what now? It would be hard to put the exchange rate liberalisation rabbit back in the hat - and would kill off any chance of the Yuan joining the IMF list of reserve currencies and forming part of the new SDR basket. And attempts to prop up the equity markets have failed despite the government reportedly spending $200billion in direct intervention and purchases, as well as effectively banning any short-selling, or in some cases even the closing of long positions.

It would seem that events have overtaken the party's attempts to control thjem, and they have now decided to sit back and let nature take its course.

Fortunately equity ownership in China is nowhere near as widespread as it is in the West, but I suspect that those that do own equities are much more highly leveraged, leading to a potential narrow but intense window of pain for a few. It shouldn't have a huge overspill into the broader Chinese economy though, and already the PBOC has taken steps to ease monetary policy by cutting rates 25bp and lowering the banks Reserve Requirement by 100bp to 18% which should mitigate further.

The government is also now attempting to slow the rate of capital flight from the country by cracking down on "shadow banking". The ostensible aim of this is because the shadow banks are illegally helping people take cash out of the country, and this is almost certainly part of the logic of the crackdown, but also reducing the role of shadow banks in the economy inevitably means that the partly government-owned and controlled official banks have a larger role, giving the communist party more control over the economy.

The wider question of course is what happens on the social front. People have grown used to the Chinese government effectively underwriting all their investments. Now a lot of those investments are going to be taking losses. Are the people going to take to the streets to protest? What will the government do if they do (apart presumably from block off Tiananmen Square)? Watch this space....

Malaysia. 2nd world country with 3rd world corruption

http://on.ft.com/1JHGZMs

It seems that finally the open secret that Malaysia is as corrupt as most of the rest of Asia is going to come into the spotlight. Malaysia is a political basket-case, with an entrenched pro-malay party which has been in charge since independence fighting off a rag tag combo of reasonably hard-core Islamists and disaffected Malays.

The Malay Chinese meanwhile continue to quietly run pretty much every business entity of note and are letting the Malays get on with whatever they do - corruption mainly.

If it does go pear-shaped for the PM then life there could get interesting

Switzerland

The strains are showing. Lots of stories here of companies reducing workforces, especially around the borders where people can simply hop into France, Germany etc to do their shopping and save 30-40%. Come this winter it'll be interesting to see how the big ski resorts fair given how much cheaper skiing in France, Italy or Austria is. Not only are Europeans likely to stay away but the Russians have seen prices double in Rouble terms so places like Verbier may well struggle.

I think Switzerland is about to experience it's first decent recession for a while. 

Devaluations

It's about time economists realised that things don't happen immediately. Companies sign supply contracts for periods of months or even years. So the recent devaluations of the € and the Yuan will take time to filter through to the respective economies. It takes 12-18 months typically for currency devaluations to work through into tangible benefits.

Europe is starting to get there but I wouldn't expect significant results till early 2016.

China is a different question. Their biggest concern has to be whether the creeping levels of defaults and economic slowdown leads to civil unrest as the population discovers that the communist party can't and doesn't underwrite everything. Yes, they have huge reserves, but there are 1.4 billion Chinese and terrible demographics - it's one of the most rapidly ageing populations - so they have plenty to spend money on already, and if they were to start aggressively selling down their reserves it could cause a rout in government bond markets reducing further the value of the bonds they hold. As the country's debt pile grows the options available to the government are reduced. I fear the time is fast approaching when they will find themselves between a rock and a hard place. 

Russia. I told you it was screwed

http://www.bloomberg.com/news/articles/2015-08-10/russian-economy-shrinks-4-6-as-oil-slump-risks-deeper-recession

And that's what they admit to. So imagine what the real contraction is.

I said it would take time for sanctions to work, but they increasingly are. The list of sanctioned individuals and companies is quietly growing, and increasingly Russia is being turned into an isolated economy. A lot of companies are going to grow increasingly reliant on government contracts and largesse. That would be fine if oil were over $100 a barrel and the coffers were full, but it isn't, and they're not.

It's going to be a long, slow, painful slide. Hopefully it won't lead to Putin lashing out, but he is a certifiable loon so who knows.

China. Is the house of cards starting to wobble?

Massive fall in lending, especially in the "shadow banking" sector.

Biggest currency devaluation since true financial market development began in 2000

Massive reduction in reserve requirements for local banks.

I fear the cracks are starting to show, but I suspect that they will succeed in papering over them again for a few more years. My concern is that the longer the inherent contradictions of a communist controlled capitalist economy are allowed to build up, the bigger the final crash will be.

And the outcome of that crash is unpredictable. Will the communists use force to hold on to power, potentially unleashing another civil war, or will they go the way of their USSR counterparts and leave behind a gaping hole which will be filled by rampant cronyism and corruption.

Either way, it'll be interesting to watch. I just hope it's contained within Chinese borders.

Saudi Arabia

Seems I was unnecessarily optimistic about the Saudi's prospects. Their cash burn is much faster than I had thought. They're screwed. Oil isn't going back to the levels they need until shale and the oil sands are exhausted.

http://www.telegraph.co.uk/finance/oilprices/11768136/Saudi-Arabia-may-go-broke-before-the-US-oil-industry-buckles.html

Arab Spring 2?

Saudi Arabia has announced it is going to start issuing bonds to shore up government finances. As is well known the dramatic drop in oil prices is largely due to Saudi Arabia's attempts to drive new producers such as U.S. Shale and Iran (their sworn enemy) out of the market. Unfortunately such is the largesse of the Saudi government's attempts to buy loyalty from a restive population that their budget only balances when oil is at $105 a barrel. It is currently around $50.

The problem is if they cut production and let prices rise, then that incentivises the higher cost producers such as shale back into the market. Estimates vary but it seems that shale is probably economic at around $60-70 a barrel, and in some cases lower. This means effectively the oil price is not going to go back to $105 in a hurry as higher prices will simply lead to increased production from non-OPEC suppliers. And that's not allowing for Russia which is desperate for revenues and will crank up supply at the drop of a hat.

To make things worse, solar is becoming more and more economically competitive and advancesat companies such as The Solar Cloth Company (www.thesolarclothcompany.com) mean that it is no longer necessary to have big, ugly, heavy glass panels on strengthened roofs, but effectively solar can be rolled out on almost any surface and simply stapled down. 

Meantime the Saudis have gone through $65bn in reserves in a year and have about $675bn left. Just over 10 years. After that they're totally screwed.

They simply have to reduce spending. Which of course may lead to domestic upheaval and another "Arab spring" style rebellion.

Watch this space. And avoid the bonds like the plague.

Malaysia. Approach with caution.

Superb. I would say only in Malaysia, but actually this could happen in most of Asia given the levels of corruption. Anyway it seems the Malaysian Anti-Corruption Commission has decided that the $650million found in Prime Minister Najib Razak's bank account was a donation, and in no way related to the $650million hole in the finances of government entity 1MDB.

So that's alright then.

Having spent several years living just across the causeway in Singapore, visiting Malaysia always felt like a visit to the second world. Nice smooth motorways with slum towns and villages on either side. Some ok, but not really maintained infrastructure surrounded by crap. It's stories like this that remind you that in fact in most ways it's really the third world with a few shiny towers and buildings thrown in. Anyone contemplating investing in anything Malaysian should assume it will go pear-shaped and treat any other outcome as a huge result. And don't forget to budget for the bribes. 

Russia - the cracks are starting to show

The Russian Central Bank has just cut rates to 11%. The rouble has spiked again and is back at over 60 to the $. Inflation is rising. The oil price is falling. The economy is crashing.

Again, I hate to say this, but I told you so 6 months ago....

This economics thing isn't so hard. Its mainly a combination of common sense and actually taking note of the blindingly obvious.

Greece - I told you so.

This falls under the title of better late than never. And gloating of course. But i did say they'd find a solution. And they did.

Surprise surprise.

There's nothing quite like the prospect of losing several hundred billion euros to focus minds on what needed to be done.

No doubt there's an under-the-table agreement that there will be debt relief and/or some sort of renegotiation (probably extending maturities and reducing interest rates) in the future.

Greek bullshit

Lots of talk about how the German attitude towards Greece is "hardening" after the referendum

Bullshit.

If they allow Greece some debt relief then at least they'll probably get some of their money back.

If they stick to their guns Greece will default and they'll get nothing,

Their choice is simple. Cave in and get something back, or be tough and get nothing back.

All the current talk is grandstanding. The Greeks have all the power in the current talks.

Euro vs US$

There has been a lot of comment in the press about the "extraordinary" stability of the Euro throughout the simmering Greece debacle. To my mind this is not surprising at all. Traders and hedge funds are simply flat the currency until they know which way to jump. No-one of size is putting on a bet. They've been burnt before by overnight and weekend announcements, and have finally realised that when dealing with politicians rational, logical economics-based outcomes are irrelevant. Once the problem is resolved one way or the other (bailout or Grexit) then you'll see the currency really move.

In economics, as in pilates, a strong core is what counts...

As the slow but almost inevitable resolution of the current Greek crisis unfolds (as opposed to the next Greek crisis once this deal expires) you can almost hear politicians patting themselves on the back and markets breathing huge sighs of relief. However this excellent article in today's FT points out that while everyone has been concentrating on the EU periphery, it's the core that's really rotten.





To encourage those too lazy to click links.....

"Italian total real economy debt (government, household and business) is about 259 per cent of GDP, up 55 per cent since 2007. France’s equivalent debt is about 280 per cent of GDP, up 66 per cent since 2007. This ignores unfunded pension and healthcare obligations as well as contingent commitments to eurozone bailouts.

Italy is running a budget deficit of 2.9 per cent. Government debt is around €2.6tn, approaching 140 per cent of GDP. French public debt is above €2.4tn, or 95 per cent of GDP. The current budget deficit is 4.2 per cent of GDP. France’s budget has not been balanced in any single year since 1974.

Italy’s economy has shrunk about 10 per cent since 2007, as the country endured a triple-dip recession. Italy’s unemployment is more than 12 per cent, with youth unemployment about 44 per cent. French GDP growth is anaemic, with unemployment above 10 per cent and youth unemployment of more than 25 per cent."

As ever the EU is merely kicking the can down the road. The problems have been the same since day one of the crisis. Europe has made no effort to pay down any of it's debts - either personal or national, and no real effort to clean up and recapitalise its banks. Until it does both it will simply limp from crisis to crisis.

Greeks bearing gifts

Looks like they might save the day. Both sides simply have too much to lose for them not to try bloody hard to come to some sort of settlement. No doubt there will be lots of fudging of numbers, and euphemisms for "the troika" and the tax rises and pension cuts that are coming, but that's fine. As long as there's a result that all can (just about) live with. 

Grexit

I still don't think it's going to happen. The EU lenders have too much to lose and will cave in. They'll have to. After all it's their money that's going to be lost. 

I believe the only possible reason the creditors have not already caved is that they have seriously underestimated the views of the Greek people. The Troika believe it is not rational for the Greeks to default and this be thrown out of the Euro and the EU. But most of the Greek people have nothing to lose. Youth unemployment is over 40%, pensions are being slashed, asset prices are collapsing and the economy is back in recession. For most Greeks they may not want to leave the EU, but the never-ending pain required to stay in simply is not worth it. As has been pointed out frequently over the ages, there are few things more dangerous than a man who has nothing to lose. The Greeks are not going to blink first.

Just like the good old days

There's talk of an emergency EU summit over the weekend to sort out the Greece "crisis". Meantime equities and bonds a all over the place.

It reminds of the good old days of 2008 when everyone had to square positions on a Friday night because who knew what firms or countries would fail or be rescued over the weekend.

Those were the days.....

Switzerland

The hills are alive with the sound of falling prices.....  http://on.ft.com/1FigXXj

The only surprise to me is the increase in retail sales. I don't know who it is that's buying stuff here but it certainly isn't anyone I know. Pretty much every person down here close to Lac Leman does at least some or all of their shopping in France, and some even drive all the way to Germany to do it (the Germans are much more organised at paying back tax than the French - surprise, surprise). Up in Zurich it's apparently the same. The major supermarket's car parks across the border are full of Swiss registered cars. Even Swiss-made products are cheaper in Euros. 

Over a barrel

That's where the rest of the Eurozone has suddenly realised it is being held by Greece. Everyone seems to have assumed that Greece was the one with the weak hand. How? Why? Greece has all the cards. If they default then it is the EU, the IMF and the ECB who will bear the losses. If they break up EMU then it is the rest of Eurozone that will suddenly be vulnerable. There are plenty of other Europeans who question the Euro - Grexit would embolden them. And they're not fringe players. Marine Le Pen is currently leading polls for the next French presidential election remember.

Greece has now said 5 June is the day they will default, when they fail to pay €300mm to the IMF. They can legitimately claim they have been trying to act in good faith, raiding every piggy bank they can find to pay the bills up to now. But those piggy banks are now empty. Either Europe relents, or Greece defaults and screws them for every penny they've lent so far.

My money's on a sudden solution appearing.

Russian dolls

Russias's gross GDP numbers are going to be like Russian dolls for a while - each one a little smaller than the previous one.

The US's tactics work. Excluding Russia from capital markets will slowly ratchet up the pressure on the Kremlin. Putin's desperate attempts to talk up the economy for local media consumption a couple of days ago were simply that - desperate. He's screwed and he knows it. The problem is that as he gets more desperate he is likely to view further provocations and expansionist moves as the best way to shore up his popularity at home. Baltic states beware. 

Russia. Finally someone spots the obvious

There's been lots of talk of Russia bailing out Greece and in return Greece vetoing EU sanctions on their new paymaster.

Finally someone spots the flaw in this plan

"There's no doubt the Russians could provide small amounts of financial support, but they're not in a position to give the kind of money Greece needs to stay in the eurozone," says Simon Tilford, deputy director of the Centre for European Reform. "The amounts involved are far beyond the scope of Moscow, whose economy is not much bigger than the Netherlands."

And of course Russia is in a deep recession so it's only going to get worse for the foreseeable future. 

Greece and the Euro.

A 4 month reprieve has been bought but don't think it's over. Greece really has the EU over a barrel. If they walk away from their debts and the Euro it calls into question the whole European project and will boost the other anti-EU / Euro / austerity parties around Europe.

Since it was first proposed in the mid 90s, I've always said that the Euro would happen and survive irrespective of economics, logic and finances as long as the politicians wanted it to survive. So far that has always been the case - everyone knew that most countries didn't qualify for the Euro at its launch by the rules set out but they all got in anyway.

For the first time though there is a question mark over its survival as suddenly there are politicians flirting with power who are openly and actively anti-Euro.

The "big powers" can't let Greece go for fear of it being the first card in a house made of them. Greece has more power than many are giving them credit for. 

Russia again. Depressingly predictable.

As always the panic rate hike has failed. All it did was kill the domestic economy. That has been recognized and a cut from 17 to 15% toady is likely to be only the first of many. At least the rouble's decline is no longer disorderly. That should allow them to embrace the currency weakness as the saviour it needs to be for the Russian economy. Sanctions are not going to be lifted in a hurry, and while I expect oil prices to start drifting higher from the current oversold position in the next few months it will be a long time till they're at the $100+ levels that the Russian government needs to make its numbers add up.

If I were the Central Bank I'd keep cutting in 1-2% slices and toast the weaker currency that follows. 

ECB - to QE or not to QE?

Tomorrow may or may not be QE day in Europe (the carefully orchestrated leaks lend me to suspect it will be). At this stage the only comment I have is to remind you of the old trading adage -  buy the rumour, sell the fact.

Russia - I hate to say I told you so....

But, from the Telegraph - "Russia set to slash interest rates just a month after hike 'mistake'"

It was always going to happen. Emergency rate hikes just make a situation worse by bringing attention to an already bad position.

The new American tactics of simply excluding countries from the world's financial markets are far more effective than the old sabre-rattling threats of yore, especially when the major corporate and bank entities of the country in question have spent the last 15 years loading up on US$ debt. If Russia is determined to stay the current course then it will have to spend its reserves on either bailing out its companies as they fail to roll over their US$ debt or defend its currency. But probably not both - there simply isn't enough cash available.

It's going to be a long and painful (for Russia's people, if not for him) death for Putin's dream of reinstating the USSR.

Ouch

Who'd have thought the Swiss National Bank would ever be the most hated entity in financial markets, but that's where it finds itself.

It's abrupt decision to abandon its currency peg to the Euro has wiped out at least 3 retail FX brokers and left FX traders and Swiss multinationals floundering.

The immediate effect should be deflation and possibly recession in Switzerland, but also a loss of a significant buyer of eurozone government bonds. The SNB was mopping up huge chunks of debt as a buy-product of it's policy. If the ECB steps into the breach with QE then all will be fine in Eurozone govvies. If not, then some of the weaker members may find their bonds drifting lower in price as a significant source of demand has been removed.

All eyes on the ECB next week then. 

Happy 2015?

And so it goes on.....

Russia has managed to put a temporary halt to the unfolding disaster but only by spending a quarter of its reserves and forcing local companies to buy roubles. The rout will resume

The U.S. seems to be doing well and the oil price fall will allow the fed to keep rates low for a lot longer. There may be a token raise of 10-20bp over the next 6 months but that'd be it, and even that would surprise me.

Europe is still screwed. All eyes are on the ECB and its hoped for QE. There will be no shock and awe here though. Any QE will be mild in scope and scale to appease Germany. The real hope for ant european QE will be to weaken the Euro and so restore lost competitive to some companies via a devaluation. The U.S. and U.K. both did it quietly, now the Japanese are doing it - and shouting about it. Next up is Europe.

What to buy? There's no real value in bonds - not much is likely to change in the foreseeable future and yields are ridiculously low. Equites? Well maybe if economies do take off, but a lot of good news is already priced in. To be honest at the moment I'm struggling to find a good place to put money to work. I'm hoping for some results from start ups and early stage companies to boost returns.

Good luck.