The week when nothing happened

9 mins. to read
The week when nothing happened

Okay, a few things did happen. But my point is that the major government bond markets and the US Dollar-Euro-Sterling exchange rates hardly shifted, and the heavyweight bourses cruised higher in a week when we were all braced for turbulence.

Article 50; IndyRef2; the Dutch elections; the indictment of Monsieur Fillon; a new Trump travel ban and the twilight of Obamacare; a hike in US rates… And yet the markets glide on calmly. Do they know something that the politicians don’t? Or are they too high (in both senses of the word) to notice what is really happening?

HM The Queen signs Article 50…?

Queen Elisabeth II gave royal assent to the European Union (Notification of Withdrawal) Act during the morning of Thursday, 16 March. The pundits had foretold that this would be the week of the Harry-Potter-esque “letter” to the European Council (“triggering” Article 50 in the lingo – as if it were a loaded musket). On Friday morning this missive was still not forthcoming.

We are told that it would be bad manners to despatch the letter during the forthcoming celebrations of the 60th anniversary of the Treaty of Rome (fun as it might be). Therefore, the only possible time window within Mrs May’s self-imposed timetable is the week of 27 March. Expect a sanguine reaction from the markets – this one has been discounted in, long since.

The FTSE-100 hit another all-time high on Thursday at a smidgen under 7,500. And as I write the Pound is back to US$1.24. Armageddon has apparently been postponed.

The distant dirge of bagpipes out-of-tune

On Monday, 13 March Ms Sturgeon fired the starting pistol for a second referendum on the issue of Scottish independence (IndyRef2) on the grounds that the Brexit vote had brought about a material change in circumstances and that Scotland was to be dragged out of the EU against its will. The proposed timeframe for the referendum is between late 2018 and early 2019 – before the full details of the UK’s post-Brexit relationship with the EU will be clear. This potentially adds another layer of uncertainty to the Brexit process – and yet the Pound barely moved.

Three days later Mrs May opined that this was not the right time for a second independence referendum. Ultimately, under Article 30 of the Scotland Act 1997 (there are a lot articles about right now) such a referendum on constitutional issues requires Westminster’s imprimatur. Amid all the recrimination it appears that Ms Sturgeon’s gambit may not have been as sure-footed as was first supposed.

Amid all the recrimination it appears that Ms Sturgeon’s gambit may not have been as sure-footed as was first supposed.

A survey for the Scottish Daily Mail found that 46 percent of Scots oppose a second referendum before the Brexit negotiations are concluded. Moreover, it seems that if such a referendum were to take place the result would be another “Naw” by 53 percent to 47. A separate YouGov poll put the unionist vote at 57 percent. Meanwhile, support for the Scottish Conservatives under Ruth Davidson seems to have surged – mostly at the expense of Scottish Labour.

Even some nationalists have cast doubt on the wisdom of Ms Sturgeon’s strategy. The fiscal position of the Scottish Government has declined markedly since the first referendum in 2014 – and only partly due to the collapse in the oil price. GDP growth and job creation have lagged behind the UK as a whole in Scotland. Some say this is because the SNP government is not business-friendly; rather it sees its main task as finding ever more ingenious ways of spending state funds. Free provision of feminine hygiene products is the latest wheeze now under consideration by the Scottish parliament.

Even if Ms Sturgeon were to secure a vote for independence, that would give Scotland at least two years to negotiate its exit from the UK – and with a UK government now outside the EU. After independence, Scotland would then have to re-apply for membership of the EU. And last week Spain warned that Scotland would go to the back of the queue of countries (Albania and Serbia amongst them) aspiring to join. Indeed, fearing that Catalonia may emulate the Scots, the Spanish have threatened to veto Scottish membership of the EU altogether. So the ostensible purpose of IndyRef2 will have been for nought.

Since all new members of the EU are now required to set a timetable to join the Euro, Scotland would have to commit to the single currency in the run-up to accession. In the meantime the country would presumably operate its own currency – one which would be extremely vulnerable to the tergiversations of the financial markets: much more so than the (British) Pound. So the additional uncertainty that Ms Sturgeon has unleashed, ironically, may come back to bite her on the posterior in the unlikely event that she triumphs.

It is a pity that Mr Blair’s devolution “settlement” did not provide for the Scottish Government to issue bonds in its own name (unguaranteed by London). That way, we could observe directly how the markets view the credibility of Scottish finances – and the Scottish Government might exhibit more fiscal rigour.

The trick that the SNP has pulled off is to convince the London-centric cosmopolitan media (especially the BBC) that they speak for Scotland. They do not. The result is that the actions of Scottish ministers are simply not subject to the same media scrutiny as those in Westminster. Can one imagine Chris Grayling, Secretary of State for Transport (in England), being stopped by police for driving without insurance – and carrying on in his job, regardless?

Mr Rutte strikes back – Mr Wilders dreams dashed

Mr Rutte, the leader of the centre-right VVD, emerged from the Dutch general election of 15 March as the leader of the largest party and is certain to remain as Prime Minister. His party gained 21.3 percent of the vote and 33 seats out of 150 in the House of Representatives. Mr Wilders populist PVV party gained just 13.1 percent of the vote (much less than the polls were reporting just one month ago) and 20 seats.

But there has been a pronounced shift to the right on the part of the Dutch electorate. The Dutch Labour Party entered the election as a governing coalition party with 38 seats but ended the day with a historic low of just nine. This has prompted debate as to whether traditional socialist parties are in decline across the board. What is clear is that Mr Wilders’s anti-immigrant rhetoric has pushed the entire political discourse towards the right, even if his own party has not profited. It is likely that the diplomatic spat with Turkey in the last three days before the election redounded in Mr Rutte’s favour. President Erdoğan’s insults only made Mr Rutte look more statesmanlike.

President Hollande and Chancellor Merkel were ecstatic: the European populist revolution has been cancelled.

A new governing coalition will almost certainly involve Mr Rutte’s VVD party, the Christian Democrats (CDA) and the Liberal Democrats (D66) each of which won 19 seats. However, that combination will still leave such a government five seats short of a majority in the House.

President Hollande and Chancellor Merkel were ecstatic: the European populist revolution has been cancelled. The Euro has perked back up this morning to USD1.07. The much heralded Euro-Dollar parity has failed to materialise – yet.

The French Presidential Election: Film Noir

Monsieur Fillon, the presidential candidate of the Republican right, is to be subjected to a judicial investigation, it was announced on Tuesday. This had little impact in the polls as his standing has already fallen to a point where few believe that he will make it into the second round of the presidential elections on 07 May.

French friends tell me that this extraordinary election – with more twists that a novel by Victor Hugo – has revealed a bitter irony. Last autumn President Hollande of the Socialist party was persuaded to stand down in favour of his more telegenic protégé, Manuel Valls. Monsieur Valls was then ditched by the party faithful in favour of the more red-blooded Benoît Hamon who is now polling in the 12 to 15 percent range. It is now widely thought that, had Mr Hollande had the courage to plough on, he might indeed have won another term!

It seems overwhelmingly likely that the second round will be a contest between Emmanuel Macron, a centre-left technocrat who heads his own as yet untested party, and Marine Le Pen of the Front National. It is said that the French vote for a candidate in the first round and against a candidate in the second. The popular wisdom is that most French will vote against Madame Le Pen.

On the other hand, Monsieur Macron has managed to become the favourite even though most French people have very little notion of what he stands for or what his policies are likely to be – beyond generalities around social justice and building Europe. Moreover, there are whispers that he could become the subject of scandal.

If the ten percent or so of French people who support the candidate of the hard left, Jean-Luc Mélenchon, were to transfer their votes to Madame Le Pen, she could still win. Last month investment firm Leonie Hill Capital’s proprietary artificial intelligence system predicted that Marine Le Pen would shock the world with a stunning electoral victory[i]. That victory would signal the end of the EU as we now know it.

Could that be why the yield on the French government’s 10-year bond increased by ten basis points to 1.10 percent this morning, up from 1.09 in the previous trading session? Consider that just six months ago, in September 2016, they were trading at a record low of 0.10 percent. Something is up.

The Fed moves

The Ides of March and another rate hike at the Fed. The yield on US 10-year Treasury bonds is now twice as high as it was last July. Back in January, Bill Gross, founder of the giant bond fund PIMCO, wrote that the bond bull market would end when the yield on the 10-year Treasury topped the critical level of 2.6 percent. On Monday it finally happened – in fact it went to 2.62 percent. He believes that the bond bull market is now officially over and that a “secular” bear market has begun. This means that bond prices could fall for years.

And then there is the little matter of Mr Trump’s budget, which I intend to discuss in more detail soon. The question is: where will the US$1 trillion needed to upgrade America’s failing infrastructure come from? And what would happen to the deficit if US rates continue to rise. It is estimated that if the Fed were to raise rates to four percent, about half of the entire Federal budget would be taken up in interest costs…

But who cares when the Dow is cruising along at around the 21,000 level?

[i] See:

Comments (1)

  • TonyA says:

    If Bill Gross is right and we are at the start of a secular bear market for (US) bonds, what are the implications for worldwide equities?

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