Greek bonds: a ‘feta’ investment or tragedy waiting to happen?
August 2018 marks the end of an era for Greece: After years of austerity, its emergency loan...
As some of our readers will remember, 30 years ago, and much to the chagrin of the met office and weather forecaster Michael Fish, a hurricane approached our shores. A viewer had phoned in – as there was no email or Twitter in those days – to say that she had heard a hurricane was on its way. “Not a chance,” said our Michael; thus consigning his name to the history books for all time.
The hurricane arrived during the evening of 15 October 1987, ravaging much of the South of England. On the same day, a few thousand miles away, Iran hit the American-owned (and Liberian-flagged) supertanker, the Sungari, with a Silkworm missile. The next morning, it hit another ship, the US-flagged MV Sea Isle City.
A few days later on the morning of 19 October 1987, the Black Monday crash began in Far Eastern markets. By 9.30am London time, the FTSE 100 had fallen more than 136 points. Later that morning, two US warships shelled an Iranian oil platform in the Persian Gulf in retaliation to recent events. By now the FTSE was down over 250 points (equating to 13%) and the Dow Jones eventually finished the day 508 points down (-22%). A popular explanation for the crash was the computerised selling required by portfolio insurance hedges; in other words, selling begat further selling.
Could this happen today? Another hurricane certainly did: although the weather
forecasters were right this time, Ophelia hit Ireland almost exactly 30 years to the day,
wreaking havoc and, sadly, killing three people.
And, whilst Iran is still very much an area of concern on the geopolitical landscape, North Korea currently holds the baton for conflict potential. What about portfolio insurance and computerised selling? Sounds very much like high frequency trading and algorithmic programming does it not? Neither of which have been tested in a real crisis. It can’t happen, allegedly, as most exchanges now have circuit breakers that close trading temporarily when markets go into free fall. History, as Mark Twain is purported to have said, doesn’t repeat but it does rhyme.
The FTSE had a disappointing September compared with previous months, failing to reach any new highs. Our stock market is becoming something of an exchange rate proxy. If sterling is weak, the market looks more attractive in dollar terms, bringing in foreign buyers. It also increases the sterling value of overseas earnings for UK-listed companies (well over 50% of FTSE 100 company earnings are derived overseas). This is the commonly perceived wisdom and, with “cable” (the market nickname for the £/$ exchange rate) currently on a piece of elastic (courtesy of Brexit negotiations, or the lack thereof), determining the market trend has become even harder to determine.
The S&P, Dow Jones and Nasdaq continued to achieve marginal new highs in September. Official GDP figures for the US economy look strong on the face of it. However, inflation numbers and employment data have been changed and manipulated to create a rosy scenario, when in fact GDP, with all the adjustments stripped out, is barely higher than the 2009 lows. This economic “recovery” has been one of the longest and most ineffectual on record. The rebuilding work post the dreadful Texas and Florida hurricanes will give an apparent boost to GDP, but where would that money have been spent without the devastation? Or are they just going to print more money?
The European Central Bank appears to be hedging its bets. Its president Mario Draghi has more than hinted at the intention to remove quantitative easing at an unspecified date in the future. But at the same time, he pretty much reiterated the “whatever it takes” doctrine in case things don’t go as planned. Compared to the rest of the world, Europe is a long way from the 2007 highs, so still has some catching up to do. However, we are rapidly approaching a very strong ‘resistance level’, that stopped the market going higher in 2014.
Despite its proximity to North Korea and the threat of missile attacks, the Nikkei has had a solid year and now prime minister Abe has called a snap election. Earlier scandals had reduced his popularity rating to below 50%, but he is now having something of a renaissance with the opposition parties in disarray. If he gets the mandate, the reform measures he has been struggling to implement stand a better chance of succeeding. This should provide a boost to the Nikkei, helping it to breach the critical 21,000 level, which has acted as a resistance level since the late 1980s.
These markets are heavily influenced by the greenback. A weak dollar is generally good, as we have witnessed so far this year, but there are signs that a change in direction could lie ahead for the currency, presaged by the anticipation of higher interest rates. Long term, the demographics of this region represent a big positive.
The oil price has pushed above $50. A ‘backwardation’ in futures contracts suggests higher prices could be on the cards, as longer term futures prices are lower than the expected future spot price. This means that producers are less inclined to invest in future capacity, ultimately leading to shortages and hence higher prices. In spite of this, a higher oil price isn’t a foregone conclusion.
Having rallied strongly since the beginning of the year, gold is having a pullback, which is not at all uncommon and goes to prove the adage that nothing ever goes up in a straight line (something that champions of the S&P 500 should be aware of…). Retracements in commodities can often be quite deep, so a test of $1,200 and possibly lower would not be out of the question before the next leg up, which could test $1400 and beyond.
Commodities in general have been out of favour for some time. Given our views on the US equity markets and bullish view on gold, this trend could be about to change.
It is still early too early call the end of the 35-year bond bull market. The market appears to be bottoming, with the 2016 low only marginally below that of 2012, but we have had similar spikes in yield before. However, the change in central bank rhetoric has added to the impetus for higher bond yields. If US Treasuries yields were to breach 3%, this would be significant. In the short-term, any market weakness could well induce some risk-off bond buying activity.