Blain’s Morning Porridge – April 29th 2019

Blain’s Morning Porridge  – April 29th  2019

“You could have a steam train if you’d just lay down your tracks…”

In the headlines this morning:

What have we got to look forward to this week?

More of the same I suspect. Strong US GDP data last week seems unlikely to change the “lower for longer” expectations on global interest rates – we’ll find out more when Powell speaks later following FOMC, and of course, it’s a Payroll Friday this week. Japan is closed for Golden Week. There is a slew of data coming out of China – telling us how fast the economy is slowing if you are a China-Bear, or “maturing/transforming” if you are a China-Bull. Should we be concerned about the demonstrations in Hong Kong over new laws that effectively subordinate judicial process to Beijing, or stories about how unbalance failed growth and investment projects in the poor West of China have left the state?

As a longer-term theme I suspect China is going to be increasingly under the microscope as trade and growth strategy comes under the cosh. The FT – writing about the Balkans, highlighted it rather well when it picked up Johannes Hahn, EU commissioner saying: “The EU has overestimated Russia and underestimated China”.. That’s pretty much true across the globe – the story is China financing infrastructure projects with the expectation the borrower nations will default and deliver assets into their hands….

Heaven forbid Occidental hedge funds and institutional investors would do the same?

Anecdotally, China’s strategy has enabled it to buy every significant port, rail hub and critical infrastructure from Beijing to Rome, with a strategy of controlling global trade, bankrupting host nations and putting in place their own Taipans across the globe. Or is that just Fake News? There are also stories about how China is struggling to monetise the New Silk Roads – in Greece, for instance, where labour and bureaucracy have made their acquisitions white elephants.

Europe is looking a tad more positive this morning. The Spanish election result was almost a pleasant surprise. The incumbent Socialist PSOE victory has won enough seats to put together a coalition. It will take time to complete negotiations, but it could happen with Podemos and some regional parties without having the embarrassment of pandering to the Catalans – all of which could be market positive. Some of the early analysis of the Spain result scales it up to a European level and says the result will defuse some of the market concerns about the potential for populist destabilisation at the upcoming European elections. I think they are missing just how strong the rise of the extreme right-wing nationalists, Vox, has been. Spain’s long dark period in Franco should have purged such excess, but hasn’t! Perhaps Vox’s success should highlight fears of gains by Far Right Nationalists across Europe – France and Germany in particular!

No surprise that S&P affirmed Italy’s BBB rating, despite the potential of a showdown with Europe over government deficits and increased borrowing. The Italian 10-yr remains in the 2.40-2.70% range – if breaks above, then be worried.

I suspect the big move in European markets comes as we see the politicking on Draghi’s successor begin. Who can continue to wield the great ECB Maskirovka? The slight of hand that the ECB can do anything it takes for a long as it takes? Draghi’s great success as a Banker and Politician was to hold the disparate council of the ECB together to enable the ECB to agree six impossible things before breakfast, including persuading the Germans to support the implicit support given to nations breaking the rules, like, er, Italy?

Bloomberg carries rumours of a compromise German candidate emerging to replace Jens Weidemann, who is seen as “unpalatable” because of hostility to Italian games. It’s clearly Germany’s turn for the top ECB job – and that’s the problem. Just because a German has never held the top ECB spot isn’t a good enough reason to hand them the most critical job in global finance. It requires panache, leadership, diplomacy, technical skills and a persuasive personality to coalesce agreement around. Germans are great technocrats, but I’ve never met a German banker with the people skills the ECB job will require. And this is why the next ECB leader will be such a critical job – if it’s a bad choice, confidence in the Euro will slide.

Finally… a whine. The powers that run the UK’s rail network (I suspect a bunch of Frenchmen having a laugh), have given us new trains for the Southampton to London run. They have air conditioning units that have been taken off agricultural freezer units! This morning, I’m told the front five carriages were so cold ice was forming on the inside windows.. (well that’s what I was told – so it must be true.) Brilliant industrial design. The guard can’t control the heating, and the seats have been designed just so an stand out electrical plug unit digs uncomfortably into passengers legs. They are planned to serve 40 years….

Out of time and back to the day job..

Bill Blain

Shard Capital