Spot Markets Live Transcript: 23/09/22

Anyone out there?

tick tock, tick tock …

Good morning everyone…

Spot Markets Live is the real-time markets chat that takes you on a whirlwind tour of the markets.

We were off on Monday as it was the Queen’s funeral and it didn’t feel right to talk markets at 11am.

So here we are today, on a Friday. Mini-budget day.

(For the newbies, we will be back again next Monday at 11am.)

The big news is, we’ve finally come out of stealth mode (as my delightful 80s nostalgia-filled promo Tweet revealed yesterday)

That’s how I see us. Commenters of fortune (but principled etc).

If you’re new to the show, bonjour.

Today we’re joined by my old partner in crime from CNBC days, Anjuli Davies.

She’s a veteran of Reuters and the Telegraph.

Before we get to a round-up of the key news stories you may not know you’re missing, an important house-keeping note.

Scrap that. TOO MUCH GOING ON

Let’s crack straight on with markets and the mini budget.

10yr Gilt yields now up +32bps to 3.84% 5yr Gilt yields +46bps to 4.03% 2yr Gilt yields +47bps to 3.98%

Chart here https://twitter.com/Chris_Whittall/status/1573247872451108869?s=20&t=sRNV7Y_iem2xKnFxURWXkw

The pound was already at the lowest vs USD since 1985

And this is the longer range from before the main news came out:

Seems to have rebounded on the back of the tax relief and then decided actually, no.

For context, the euro has not been doing much better against the dollar:

Yeah, the Gilt moves are insane.

Here’s what the AI thinks of Britain.

(The prompt was UK Gilt Meltdown)

The Treasury should tap into the good public will about the Queen and issue “Elizabeth Bonds” to help fund the energy caps.

As he notes:

This is not something for the Debt Management Office or the Bank of England, both of which are essentially concerned with tapping the international bond markets, what Mark Carney once irritatingly (and wrongly) described as relying on the kindness of strangers. Instead, it should be aimed squarely at individual UK investors, inviting us to understand the fiscal mess we’re in, and to fund the government to the other side of the energy crisis. Looked at this way, the state’s position today is akin to that other desperate need for money to pay for another national emergency, the First World War. The solution then was to issue a bond which dwarfed all others at the time. It became war loan.

Similarly, the Elizabeth Bond would need to be more imaginative than we have grown used to with debt offers, but since the government can write the rules for National Savings any way it chooses, it might invite NS&I to come up with an idea. The bond could (for example) allow holders who leave their money in for a decade to withdraw it with the rolled-up interest tax-free. NS&I demonstrated last year that it is capable of handling tens of billions of pounds without breaking down.

It’s called “financial mobilisation”.

First, let’s see the stock market response

Until about 30 mins ago it was dominated by the housebuilders (no surprise) and now it’s Smiths and Kingfisher (which owns DIY stuff right?)

So to recap Kwasi Kwarteng has:

• abolished the additional rate of income tax of 45 % to  be replaced with 40 % (apparently, it only applied to 629,000 people earning more than £150,000 and will hand them an extra £10,000 a year)
• said the basic rate of income tax will be cut from 20% to 19% on April 1, a year earlier than planned
• Reversed the National Insurance hike.
• Cut Stamp duty – effective from TODAY. The tax free-band is being doubled from £125,000 to £250,000. For first-time buyers, no stamp duty on first £425,000 (from £300,000). Treasury reckons this will enable 29,000 more house moves each year.
• Scrapped plans to raise corporation tax to 25% next year.
• And scrapped banker bonus cap

Christopher Hope reported :

There is an audible gasp in the House of Commons as Kwasi Kwarteng abolishes the 45p tax rate. One Tory back bencher texts me: “Rejoice we are Conservative again.”

Housebuilders clearly benefiting from the stamp duty situation — BUT

how annoyed is anyone who bought a house in the last four years?

It’s all a bit unfair…

Table of potential savings

“EQE”

12:20
So basically, even though the BoE is entirely independent, and no-one would suggest the opposite, the energy cap is going to be de facto funded by EQE.

Again entirely independently.

Now seems like a good time for a rates recap because things have been moving a lot. And it’s worth keeping the big picture in mind:

• The Bank of England Monetary Policy Committee voted on 22 September 2022 to increase the Bank of England base rate to 2.25% from 1.75%

• The current Federal Reserve interest rate, or federal funds rate, is 3% to 3.25% as of Sept. 21, 2022.

• The Bank of Japan maintained its key short-term interest rate at -0.1% and that for 10-year bond yields around 0% during its September meeting, hours after the US delivered a 75bps rate hike, the third such rise in a row, and signaled more hikes would be delivered in future meetings.

• The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 2.35%. The next RBA Board meeting and Official Cash Rate announcement will be on the 4th of October 2022.

• The Sveriges Riksbank hiked its benchmark rate by an unprecedented 100 bps to 1.75 percent in September of 2022,

So that’s about where we are.

Oh and the SNB is now also back in positive territory as of this week.

Raised by 0.75 percentage points to 0.5 per cent.

The ECB is the last man standing, but is expected to raise rates between 50 and 75 basis points in October having already raised by 75 basis points to 1.25 in September .

Rabble – do let us know if there’s any specifics from the mini budget you want to focus, otherwise some quick corp news.

Anjuli?

Reuters reporting that the Swiss bank is sounding out investors for a capital hike – feels like 2008 again

Shares were down 8% earlier

very good

12:28Can’t seem to get a quote for Credit Suisse? Is the swiss market closed or something?

Well the free chart makers haven’t updated yet

Here’s the longer-term trend:

(Subscriber note – SML is, much like Britain, still very much dependent on the kindness of bond investors with Bloomberg Terminals for the sourcing of their charts. Unless we get more significant funding soon.)

This table comes from Business Insider and works from the BOTTOM UP. FYI

Could be because crude is down.

12:33Ugly PMIs, Crude down. But nothing clear about windfalls as far as I can see.

Mystery

We had a bit of a French takeover bonanza earlier this week

Is this why Macron has been so nice to the UK recently?

I noted there was a bit of soft power display with Truss this week.

https://www.theguardian.com/politics/2022/sep/20/emmanuel-macron-liz-truss-bilateral-meeting-move-on

Emmanuel Macron has offered Liz Truss an olive branch after her controversial “friend or foe” remarks by saying after their first bilateral talks that it is time to “move on”.

The two leaders appeared to smooth over tensions during their meeting in New York, which No 10 said was dominated by Ukraine and energy security, but avoided the controversial issues of the Northern Ireland protocol and migration.

King Charles is also apparently planning to visit France on his first overseas outing.

Speaking of the continentals

The point of this service is to draw help bridge general blind spots, especially in the macro investing community.

And one big and perpetual blind spot here in the UK (and I suspect in the US) is the local political nonsense going on with those dreaded Europeans.

Especially if they’re not France or Germany.

But, as far as the average anglo-saxon’s understanding of the country goes: Italy is mostly a black box.

The Dark heart of Italy

another political classic, still relevant today

Don’t get me wrong. I love Italy. It’s nuts in a reassuring loafer-wearing way.

But let’s face it.

When it comes to the mystery of Italian politics, the general Anglo-saxon view is that Draghi or Berlusconi are always in charge –  apart from that one time some comedian guy tried to take over the government. But failed.

(oh yeah, how did I forget Super Mario Monti. Berlusconi, Monti, Draghi)

It’s also a major European manufacturing centre and the place where lockdown policy was normalised as a European thing.

Things you probably didn’t know about Italy:  It has a larger amount of gas storage regasification facilities than Germany. And a direct pipeline to Algeria.

https://www.ilpost.it/2022/09/04/dipendenza-gas-russo/

https://twitter.com/JeremyCliffe/status/1573209844450197504?s=20&t=wG20atvpcv74NNZej8S3Lg

Do look at the vid

Here he is. I don’t speak Italian but apparently, he’s saying some quite nice things about Putin.

Jeremy Cliffe from the New Statesman, who presumably does understand Italian, Tweets:

Silvio Berlusconi claims his old pal Putin was “pushed by the Russian population, his party and his ministers” to attack Ukraine and just wanted to “replace Zelensky’s government with a government of decent people and be back in a week”.

Did you know her name? Because I didn’t until I bothered to look.

Information too often is out there once you look for it. It’s just you don’t until someone prompts you to. And so I bet most people in this chat don’t yet know that the new face of Italian politics is…

Giorgia Meloni. Here she is:

 Apparently, she’s a dangerous far-right demagogue.

The important news is that in the last two hours I got an email ping from the Economist that she’s made it onto the front cover this week and they’re asking “Should Europe be worried?”:

As my former colleague, Javier Blas of Bloomberg likes to point out, based on the Economist’s front cover track record, the answer is no.

We have two covers this week. In Europe we ask how worried the world should be about the probable election this weekend of the most right-wing government in Italy’s post-war history.

Here’s the hedge:

But on the Italian front, the Economist’s assessment is as follows:

A three-party alliance is expected to win more than 60% of the seats in parliament; the Brothers of Italy (FdI) looks set to dominate the trio, and its leader, Giorgia Meloni, to take over as prime minister. The FdI has its roots in neo-fascism. In speeches Ms Meloni hammers away at illegal immigrants and “woke ideology”. Bankers fret that she will tangle with the European Union, go soft on reform and lose control of Italy’s mountainous debt stock ($2.7trn, or over 150% of GDP). And yet Ms Meloni has tried to soften her hardest edges. She has clearly stated that she has no plans to strike down the law that permits abortion, she no longer talks about scrapping the euro and she has committed herself to follow the reform plan drawn up by her predecessors and approved by the European Commission. Although Ms Meloni gives European leaders plenty to be anxious about, they should calmly accept Italy’s democratic decision to elect her, while privately warning her how damaging to both Italy and the EU a falling-out would be.


Two closing thoughts on Italian politics.

 It’s interesting of the Economist to argue in favour of Italy’s democratic right to elect a dangerous far-right demagogue and not be penalised by European institutions for doing so.

 Because obviously the same has not applied to Hungary or Poland, and the latter is still waiting for the delivery of its Covid relief funds.

I’m reading a great book by Paul Einzig on the economic foundations of Fascism and I have to say there’s more than a slight ESG theme to it:

But what everyone wants to know is WHAT WILL HAPPEN TO THE BOND YIELDS?

That’s the generic 10yr Italian vs the German 10yr

and this is the 5 yr equivalent spread:

So what does that tell us?

(Germany turning out to be the dark horse of European Sovereign Debt instability is probably not something any investor bargained for.)

And yet here we are.

Target2 imbalances suggest a similar thing.

This is data from September 1

German balances at the ECB definitely seem to be plateauing. Luxembourg ones, however, are getting larger.

Spain and Italy’s deficits are still widening tho

That would imply that it’s the tax efficient who are starting to de facto fund periphery imbalances in the ECB.

We are nearly out of time, but since it’s our big official launch, just before we finish…

I wanted to flag this cross border audit inspections story from Reuters:

https://www.reuters.com/markets/europe/exclusive-china-sends-regulators-hong-kong-assist-us-audit-inspection-sources-2022-09-22/

It may have meaningful effects on investors in US-listed Chinese stocks.

Anyway from Reuters:

HONG KONG, Sept 22 (Reuters) – Beijing has sent a team of regulatory officials to Hong Kong to assist the U.S. audit watchdog with onsite audit inspections involving Chinese companies, four people familiar with the matter said, as part of a landmark deal between the two countries.

A China-U.S. agreement last month allows U.S. regulators, for the first time, to inspect China-based accounting firms that audit New York-listed companies, a major step towards resolving an audit dispute that threatened to boot more than 200 Chinese companies from U.S. exchanges.

About 10 officials from the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) have arrived in Hong Kong and joined the audit inspection, which started on Monday, three of the people said.

The officials will assist a team of inspectors from the Public Company Accounting Oversight Board (PCAOB), the U.S. audit watchdog, who are in Hong Kong for the onsite inspection, the four people said.

This to me is an amazing story.

What it reveals is that consensus on international accounting standards is akin to consensus on international weapons treaties.

There is basically zero trust in the ability of non-US auditors to faithfully review such accounts.

The actual act of sending in “head office” to make sure things are being done right in the periphery has become a political act.

 Like Diocletian not being able to trust his own governors in the periphery and having to send in a deputy emperor to oversee things directly.

Here is the Public Company Accounting Oversight Board’s factsheet on the matter:

https://pcaobus.org/news-events/news-releases/news-release-detail/fact-sheet-china-agreement

“Our dedicated teams of professionals have been preparing for this moment for months, and they are ready to work swiftly, but thoroughly, to carry out our inspections and investigations. Whether our teams are able to complete that work without obstruction will inform the PCAOB’s determinations at the end of this year.

Okay … I think we will finish on that. Neil is back with us on Wednesday, and Anjuli will be here on Monday again.

There are three key things that will make or break a markets chat such as this.

1) Consistency and professional discipline.

2) Frequency

3) Actual Insight

The first is something we can already bring to the table. Come rain, shine, or electricity failure, the Blind Spot team can from now (at least until we go totally bankrupt and lose our homes) always be depended upon to gather here every Monday at 11am.

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JUST LIKE BRITAIN

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Finally, the third variable – insight – is a function of scale. We are all professionals here and know our stuff. But we’re only as good as our sources. If you think there’s something we should be looking into but aren’t let us know. You can contact me on [email protected] and Anjuli on [email protected].

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