Monday, 29 December 2014

Europe - Dawn of the Dead or a Bad Ghost Train?

The trading background - 

We are in the last couple of days of the year where funds are most unlikely to do anything. First, because they don’t want to screw up positioning or performance in the last couple of days before benchmark fixing with respect to performance and, more importantly, bonuses. Second, because they are sipping sloe gin on a shoot or stuck in a traffic jam in the alps. Or if US based, they are in holiday homes in warmer climes. Bank desks, if they are now allowed to take positions on the relaxation of Volker rules, will be staffed by juniors whose simple instruction is not to mess it up and to quote everything defensively.

So who is left to play? Short term speculators and the noise.

The noise background -

Over the last couple of weeks the commentary towards the EU has turned from one of background resignation to one of imminent doom. The oldest and darkest reasons for a collapse in everything EU have come crawling out of the ground zombie-like having been buried two years ago. The arguments are not new but they are dusting themselves off and rallying around the colours of the Greek election.

The noise is getting positively apocalyptic from the US commentary where, with greatest respect dear US friends, opinions appear to once again consider Europe in black and white terms rather than appreciating its grey adaptive nature . The lessons of the pain felt when short Euro risk assets positions were torn asunder over the last three years has obviously been forgotten. Or perhaps there is a hope of pride being restored in a ‘there told you it would happen in the end’ sort of way.

Yet calling EU to break with no time frame reference is not a way to make money and can be put in the same (very full) camp of China permabears calling a credit bubble explosion as a reason to be short China stocks and long China bonds which, as an 18% rally in SHCOMP in the last month and a fall in bonds of 4% attest, would have been a very uncomfortable position. It’s a bit like holding gold at $1500 calling for the end of the world (or Bitcoin come to that) where one needs a decent alternative income to live on.

The Greek elections

Despite the noise today the greek elections are not as Euro threatening as the binary zombies would call. Syriza don't want to leave the euro now and there is a Euro firewall against internal problems. Even the massive Cyprus collapse and subsequent bail-in didn't rock the boat, a default on official lenders only hurts Greece not anybody else. What is more the consequences would serve only to refocus reform momentum in the likes of Spain and Italy. Greece looks to be running twin surpluses now anyway.

Let’s also consider that the polls show that the Greek Public didn’t want another election anyway. Syriza lead has shrunk to 2.5% and now that the presidential vote has failed the government parties can throw it back at the independents who forced the unwanted election. This is bad from a sectoral standpoint (ie for Greece) but doesn't mean it's a general Europe down trade this time. Especially with the QE carrot dangled for late January where I really can’t see the ECB holding back on anything they plan to do because of Greek politics.

So what’s the plan Stan?

The market always needs a victim to sacrifice on the altar to the Trading Gods at the start of the year in order to bring great wealth and fortune. Last year emerging markets were dragged off, dressed in the ceremonial robes of strong USD and high leverage and given a good stabbing only to get up a bit later and wander away. But this year the screaming for blood appears to be directed towards the EU. The sacrifice is being prepared predominantly by the US priests.

So for timing. Traditionally I have always held the 19th of Jan as a turn date away from the first moves, but with the ECB and Greek elections a few days afterwards it is safer to call a EU bounce after that. So the plan is to buy any dip in EU risk assets (only of there is a dip and this hasn’t already played out buy the end of the week) around the 19th Jan in readiness.

Moving on to a more general view, there was an interesting Bloomberg article a week or so ago. There has been a 12% S+P500 rally over 2014 vs a 6.5% fall in USD denominated international equities. The widest divergence since 1992. There have been four other instances since 1970 and each time the MSCI rallied the next year outperforming the US by 14%. Now of course I am usually the first to poo-poo ‘happened like this before, will again’ arguments. But as this supports my own beliefs I will of course shout it from the roof tops.

Europe is most probably not experiencing a zombie dawn of the dead,  we are rather experiencing a rather poor end-of-pier ghost train.

Happy New Year and may the noise of the markets not drown out your celebrations!


Anonymous said...

Angus says :
Spot on Polemic. By the way Happy New Year. The political and corporate investment in keeping the €zone together will take more than Greece to derail. An incoming government in Athens ( of whatever complexion ) is likely to play hardball with the Troika with the aim of getting as much of its debt overhang as possible written off. Herr Schauble on the other side on the net will be doing everything he can to prevent this. The dispute creates a great story for the media to hype ( and some bulge bracket analysts ) but will end up with Greece in the € but with a further degree of debt restructuring - which may or may not be the equivalent of forgiveness.

The real issue is what happens to Germany. Will it move towards some form of easing on austerity ? Merkels coalition partners led by Steinmeier and Gabriel almost certainly want to move in this direction but the timing and extent of the shift may be shaped by political considerations regarding the AfD and opposition in the middle ground of the Bavarian CSU. When it does happen the CAC40 looks like a buy as the greenback strengthens .

The hidden worry is what happens in Italy now that Napolitano has stepped down. Monti is unacceptable as are many of the old Socialist Party candidates Renzi would like to turn to. Berlusconi sees himself ensconced in the Quirinale but hell will freeze over before that happens. Draghi, with strong personal reasons to return to Rome, is too young and too Goldman to be accepted by the bulk of Renzi's party. His departure now with QE still in the works is unthinkable even to Weidmann. The fight over the new President could derail the Italian reform programme which has progressed at a leisurely pace and may now slow down to a complete halt. Don't think , but could be wrong, that many Madison Ave traders have woken up to the implications of that yet.

Agree that €zone equities are cheap but there will probably be a number of great trading opportunities throughout the year as politics drift in and out of the headlines.

Polemic said...

Thanks Angus, first for leaving a comment and second for its content. Madison Ave could well shift to the Italian story but only when their Greek one is of no more use.

Blogger said...

Discover how 1,000's of people like YOU are working for a LIVING online and are living their dreams right NOW.

Get daily ideas and instructions for earnings THOUSAND OF DOLLARS per day FROM HOME for FREE.