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.