Spot Markets Live Transcript, 20/10/23 (M&A pipeline, Cbank funding models and Poland latest)

Morning from Warsaw, Poland SMLers, where I was moderating a CFA panel yesterday about Poland’s economic policy outlook.

Betaville back in the house!

Little old Betaville

Today Julian is off. Apparently he has some sort fo “life” or something, which means a few days up until Christmas will be no gos.

So nice to have Ben back

How’ve you been?

Scooping around as usual?

Perpigina … in French Catalonia

Perpignan

I meant

I highly recommend both

also into the Lot region in the summer

So What should we start with?

The BOJ announced another five-year funds providing operation as well but JGBs are moving higher all the time and I think there’s now more official talk about the bank dropping its negative rate policy sooner rather than later.

Over in the UK, retails sales have come in worse than expected because of warm weather, but the net public borrowing figures – while still enormous – were better than expected.

German PPI however… Aye caramba.

BERLIN, Oct 20 (Reuters) – German producer prices posted their biggest year-on-year decline in September since data collection began in 1949, spurring hopes for further easing of inflation in Europe’s largest economy.

Producer prices fell slightly more than expected in September, decreasing by 14.7% on the year, the federal statistics office reported on Friday.

If germany sneezes who else catches a cold?

(Hint, warsaw)

Btw Rabble, hello there. Do make yourself known.

These sessions always work best with interaction

Ben’s what the market picture today?

Dax down about a 1pc

same with the Cac40

and Footsie off 0.7pc

Labour won two Conservative safe seats in a double by-election victory overnight.

Voters in Mid Bedfordshire and Tamworth swung significantly to Labour, in what is a woeful result for Prime Minister Rishi Sunak and his Tory party.

Mid Bedfordshire, the former seat of Boris Johnson ally Nadine Dorries, saw a 20.5 percent swing, transforming the 24,664 Tory majority into a 1,192 Labour one. The new MP is Alistair Strathern, 33.

In Tamworth, the seat of disgraced former Conservative MP Chris Pincher, also saw a huge swing of 23.9 percent, with a 19,634 Tory majority turned into a 1,316 one for Labour, electing Sarah Edwards, 35, as the new MP.

Speaking specifically about the Tamworth result to the BBC, British election wizard John Curtice said “no government has hitherto lost to the principal opposition party in a by-election a seat as safe as Tamworth.”

Speaking on both the results, Curtice told the BBC that we are seeing the “top 10 of worst Conservative performances against the Labour Party.”

Hang on, Ben’s about to get scoopy and we ain’t got enough rabble in the house, So i am going to pop off quickly to do a tweet

I meant an X

or whatever it is

11:40That’s done now

There is one other thing i’d like to flag before we get into the heavy duty stuff.  My old boss Paul Murphy at the FT has come out with one hell of a yarn for the FT Magazine this week.

Do check it out.

https://www.ft.com/content/8d3c8121-5963-466c-96d8-7dda7e9cee90

It’s an absolutely bonkers story about how a would-be crypto bond villain seasteader went totally paranoid and tried to contract an assassin to bump a Thai official who was preventing him from realizing his seasteading utopia dream.

need to find an hour or so and comfy sofa

to sit down and read it properly

but companies are still doing deals

Sounds like a whopper

Are private equity firms locked out of the M&A market because of the tight funding situation?

But that isn’t the case

Apollo last week agreed to buy London-listed The Restaurant Group, operator of Wagamama, for £506 million.

Not a fan

but I am a bit of a food snob

reminds me of school

So no surprises then there is tons speculation circulating the London market about a number of FTSE 100-listed companies, such as M&G and Aviva.

UNCOOKED: Market gossip as Betaville receives it. This scuttlebutt has just come in and hasn’t been checked with all of Betaville‘s well-informed RARE sources let alone formal journalistic channels (public relations executives, bankers etc). The rumour might be total codswallop, rubbish or nonsense – but then again there may be something in it, so it’s worth airing on Betaville

but now there are UNCOOKED bid rumours circulating about another party from the US being interested

Previously there was gossip life insurance consolidator Phoenix could be a partner on the deal but now there is talk Rothesay, a pensions insurance specialist, might be interested in that bit of the M&G business.

Will hold the fort

sorry

Are they a shipping company?

They are a Belgium shipping dynasty

Euronav is the shipping company

maybe bottom fishing buyers are stepping of the woodwork

there is another story about REIT in the US

The company has been carrying out a strategic review. Westdale is said to be one of the bidders in the sale process as well as a consortium led by the management of Apartment Income REIT Corporation.

Julian offers the following dispatch from the apparently sub-optimal conditions on the train from Euston to Liverpool:

China pumped the most liquidity into its financial system via short-term monetary tool on record, suggesting policymakers are keen to keep funding costs low to bolster the economy.

This comes as the problems in the real-estate sector get worse by the day.  Evergrande however was apparently tinkering with the terms of its restructuring.

https://www.reuters.com/world/china/china-evergrande-revises-terms-proposed-restructuring-2023-10-20/

Oct 20 (Reuters) – China Evergrande Group (3333.HK) said on Friday it was revising the terms of a proposed offshore debt restructuring deal to meet the firm’s situation and creditors’ demand, without providing details.

Evergrande, which is at the centre of China’s property sector debt crisis, said late last month that its billionaire founder was being investigated over unspecified crimes.

It has also said it was unable to issue new debt – a crucial step in a restructuring – due to an ongoing investigation of its main unit.

Deutsche’s Jim Reid always has such good charts

As he notes, cash has now outperforming almost all fixed income

From his note:

With this week’s bond sell-off there is now no fixed income asset that has outperformed USD cash amongst the main assets we use in our monthly performance review. The last holdout was US HY and with this week’s bond sell-off, the return of the iBoxx US HY index has dipped below the return of US T-bills YTD. US HY has been seen to be a strong performer this year, but it shows how difficult it is for any duration to perform in a sell-off, especially in a heavily inverted curve environment where carry is negative for government bonds relative to cash.

Today’s CoTD is an abridged selection from our performance review showing where T-bills rank YTD in USD terms. As discussed, it now eclipses all our main global fixed income indices. To outstrip it you have to go into selected equities, Oil or Gold. Clearly, the NASDAQ (+28.1%) has trounced everything and has taken the S&P (+13.8%) with it. However, the equal weight S&P 500 has underperformed cash at just under 1% return YTD in total return terms. The interesting thing is if you’d told most people at the start of the year that 10yr yields would be around 5% by October, not many people would have wanted to own the NASDAQ given the near one-to-one negative correlation to yields in prior quarters. So AI has helped create a dramatic decoupling.

That leaves you with oil or gold

or is that a reaction to the possibility of Labour taking power

from the Tories

btw do you even remember 1998?

I was re-taking my A-levels

So the difference this time, relative to back then, is we have much less growth potential

And the BoE’s Andrew Bailey admitted that much himself

12:06The concern really, at this point, is how we manage to keep inflation in check without collapsing growth. And can we slingshot our way out of the doldrums. Funnily enough, the Truss argument is making its way back again. And the ridiculously high bond yields are increasingly proving her point.

For the UK, this time, teh difference is that sterling is still relatively stable

Let me find a chart

12:08\

Ben is so overcome he fell off his chair and broke it into a 1000 bits.

that was painful

And @john brings up an important point

this was the moment of independence for the BoE

and that is a good segue into the broader chat of what’s happening with cbanks today

?

IN an ideal world, cbankers are fully self funded and don’t have to go cap in hand to any Treasury

on the contrary, they send dividends to the Treasury

but with growing concern about funding, this leaves them open to independence attacks. And certainly the big debate is how tehy can cover their costs without impacting policy at the same time.

Over in the ECB, the big thing on the table now is a possible hike in the minimum reserve ratio to 10%.

This would be on a zero rate basis. And an opportunity for the ECB to make some arbitrage again, by not paying the banks the high interest rates they’re supposedly charging the market

But in reality it amounts to a tax to keep the cbank independent.

Politicians, however, might view it differently. And tehre are already ECB policymakers warning that it’s not up to the ECB to tax banks in this way. Rather it’s up to governments. We heard that most recently from Belgium’s Wunsch.

But that would be very very controversial, and likely to be interpreted as a joint financing mechansim for the eurozone by the back door.

Markets would love it, as it would probably create a super high quality liquid asset, and actually provide some cohesion to the eurozone fiscal picture. But can you imagine how the respective treasuries would feel?

SO it’s unlikely to happen.

?

Largely unreported, the BoE has stealth changed its funding model

It’s gone from a cash ratio deposit system to a bank levy

why is that important? Again, because it’s about how the Bank raises cash to fund itself and to remain independent

the old cash ratio model, was eating ever greater chunks into the Bank rate

the way it works, is that the Bank rate (which is a deposit rate), is help back from a small section of funds so that the cash on deposit can be used to invest in gilts, and the proceeds used to fund the BoE.

But that model is not ideal when your main policy transmission mechanism is a deposit rate.

But that’s a different story to a large extent.

With the Bank Levy, the BoE will be able to raise the funding it needs without cutting the remuneration on bank reserves, and this is important, as it will be levy on profits generated rather than a preemptive cut which may impede credit and liquidity ciruclation through the economy.

So if the ECB goes down the reserve hike route, this could be a big opportunity for banks in the UK. It will definitely be better and cheaper (i suspect) to operate in the Uk. So there’s that brexit divergence for you.

but tell us more about Poland

aside from the election

what’s the food like?

12:23While the ruling right-wing party of Jaroslaw Kaczynski technically won the vote, they failed to get enough of a majority to rule. So the opposition is likely to be in power. But there are still some technalities before they take office, not least the fact they have to win a vote of confidence, and their coalition is mainly only united by their mutual hatred of the Law and Justice party.

However, as an impartial observer, what I will say is that for someone who is supposedly a terrible anti-democratic authoritarian, Kaczynski has not questioned the vote, and has on the contrary promised to lead an active opposition.

but there’s lots of crazy stuff going on. And the main talk is all about the incoming PURGE.

Donnie T

It looks very likely he will be PM, but not definite

But really the key thing is what the new government will do to the old PiS loyalists. The news today is dominated by talk that PIS officials (who the opposition have long claimed are criminals) are in the midst of disposing of all sorts of “evidence” that could be used against them.

This sort of tit for tat “you’re either in power or in prison” politics is not really very healthy in my opinion.

Especially considering this (chart via Fitch):

12:28Poland is now officially the biggest defence spender in the EU. And personally having a highly polarised and non functional government in that context, is not a great idea.

not least because i have to go and get some food

before i get on my flight home

but anyway thank you again for joining, we will be back on MOnday with Julian

Goodbye from me!

thanks for having me