IIFT Daily Note with Peter Brown

Yesterday’s fantastic note from David.

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Daily Note – 1914 all over again?


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Europe: Political tremors from Donetsk to Dublin

Eurozone: Robbed Cypriot savers to sue the ECB

Eurozone: Draghi “Asset buying plan ready for lower inflation expectations”

The Week ahead: Focus returns to the United States


Good morning,

Today we are going to take stock of the huge changes in the European political landscape ushered in by the dramatic election results over the weekend. Let’s put these into a historic context because the one thing about historic events is that the people living through them rarely see them as historic at the time.

However, these events from Donetsk to Dublin are truly historic and can only mean a weaker Euro in the period ahead.

This week one hundred years ago a young Serb was practising his shot in a Bosnian forest. A month later he would be successful in his murderous mission. John Redmond, the undisputed leader of Nationalist Ireland had, after an epic parliamentary struggle, just forced through the Government of Ireland Act. Home Rule was here. It had massive public support.

Had anyone suggested that the Irish Parliamentary Party, the dominant force in Irish politics for the previous half century, would disappear over the next few years, that person would have been laughed at.

Had anyone gone on to suggest that the Russian, Austro/Hungarian and Ottoman Empires would also disappear; they’d have been committed. Indeed had someone suggested that soon Britain would fight Germany and win but soon after the War victorious Britain would have lost more of its pre-war landmass than defeated Germany, there would have been howls of laughter.

Yet all this happened.

My point is that what you think can never happen, sometimes does happen.

In 1914, the Irish Parliamentary Party and all the mainstream European parties and Empires which had been with us for centuries, gambled on a short war. Had the war been “over by Christmas” as many expected, there can be little doubt that in Ireland Redmond would have prevailed and the extreme republican Sinn Fein would have remained on the fringes of history. Equally, it is hardly likely that Lenin would have won in Russia without the long war, and the Austrian and Ottoman empires might have survived more or less intact. But this didn’t happen.

As the war dragged on, the credibility of all mainstream European politicians disintegrated.

The 2008-2014 recession can be seen as the long war. All policies put into place since the advent of the slump have been predicated on the notion that growth would recover rapidly. But this has not been the case and as the short sharp crisis gave way to a long drawn out war of economic attrition, old certainties have atrophied. All across Europe, nationalists, right wingers, left wingers, rejectionists, populist and “whatever-your-having-yourself-ists” have won huge swathes of the vote.

The reaction of the mainstream has been (like the Russian Emperor) to ignore the chaos, but this might not work. The peasant revolt in Europe is in full swing, and where it ends is anyone’s guess.

One thing is clear: the Euro will suffer in this new world. Draghi will unleash his QE into this political turmoil, sending the currency down, along with rates. Keep your eyes on the big picture from here.

Europe: Political tremours from Donstesk to Dublin

Whereas the independence movement in our neigbouring Scotland is a civilised, rational affair, the same movement in Ukraine is not.

The weekend’s President-elect Petro Poroshenko has set Ukraine on a collision course with Russia even before the last vote had been counted, vowing to step up operations to rein in separatists in the east of the country.

“There will be a sharp increase in the efficiency of anti-terrorist operations,” Poroshenko said in Kiev yesterday. “They won’t last two or three months; they’ll last a few hours.” In Moscow, Foreign Minister Sergei Lavrov said that any escalation would be a “colossal mistake.”

The difficulty of Poroshenko’s task was clear in Donetsk, where paratroopers, helicopters and warplanes were deployed after rebels ignored an ultimatum to leave the local airport. A clash between government forces and gunmen near the city’s airport has left 30 dead.

Last Thursday, Vladimir Putin told various European governments that Russia will no longer supply natural gas to Europe as of June 1st, 2014 if Ukraine does not pay its debts to Russia. More specifically, Vladimir Putin stated that Ukraine has to pay for gas in advance starting in June of 2014 because Ukraine already owed Russian company Gazprom $3.5 billion for gas.

The Russian 10 year note yield has been the “barometer” of risk when considering the situation in Ukraine. See its trajectory in the chart below. One word of warning from 1914 is the fact that financial markets in London and Berlin continued to trade on August 2nd 1914. On August 3rd war broke out and the supposedly forward-looking markets not only didn’t predict it, even the day before, but when they closed on August 3rd, they didn’t open again for four years! So much for foresight.

Figure 1: Russian 10 Year Yield %

Chart 1 27 May

Eurozone: Robbed Cypriot savers to sue the ECB

Cyriot savers are suing the European Commission for having had their savings confiscated last year.

They are also challenging the capital controls placed on deposits over the Cyprus crisis.

The reason the EU went after Cypriot deposits is because the owners of these deposits had Russian passports. Would they go after dodgy money in Luxembourg where the owners of such dodgy money have German passports?

I’d like to see the Cypriots win this one.

Eurozone: Draghi “Asset buying plan ready for lower inflation expectations”

Just over a week before the ECB’s next policy meeting, where it is predicted to cut interest rates to stoke inflation, central-bank officials and researchers are meeting in Sintra – once home to Byron. I suspect Byron’s drug taking is being matched by today’s central bankers if they believe that can avoid European QE.

With the turmoil in European politics, deflation and the on-going weakness of the real economy, QE is on the cards sooner rather than later.

Figure 2: US vs EZ 3mth Bank Rate & Euro FX

Chart 2 27 May

The Week ahead: Focus returns to the United States

Table 1 27 May

This week brings us data for US Durable Goods, Richmond and Dallas Feds, Chicago PMI, Markit US PMI, S&P Case Shiller, Consumer Confidence; and Pending Home Sales. All these indicators have the potential to shape things heading into the key US employment report on Friday week.

In recent days US economic data has managed to drag itself back into positive surprise territory (see chart below). In contrast, the EZ data has continued to weaken, reflecting the poor Q1 GDP data and more recent industrial production data in Germany. I see both these trends continuing.

Figure 3: United States Economic Surprise Index

Chart 3 27 May

Finally today consider the spread between German and US 10 Year Yield (see below).

Figure 4: Spread between German & United States 10 Year Yield %

Chart 4 27 May

As the US has recovering and the case for further easing from the ECB gets priced in, the yield of US 10 year note is now nearly 120bps more than the German one. This is more reason to be bearish on the Euro.

Portfolio: Sideways ahead of key week for US data

Portfolio 27 May




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