Financial market coverage hyperbole vol. #1: Syria edition

As the New Statesman put it: Syria has finally seeped into financial markets. It’s horrific.

The FTSE falls 0.5 percent? And only bounces 0.45 percent the next day? The horror, the horror! If the UN proves that Assad is responsible for using chemical weapons against his own people, and if he is called to testify in the Hague (after however long evading capture), I’m sure his biggest regret, in a heartfelt retrospective confession, will be the damage done through nerve gas to all those innocent companies, the publically traded casualties of war.

Even if stock markets had genuinely tumbled by ten times what they have done, investors could count themselves lucky that they’ve come no closer to feeling the human repercussions of what’s happening in Syria. The need for perspective aside, however, what’s noteworthy from a stock market point of view is actually how muted market reaction has been to the Syria situation.

Yesterday we opened in Europe with stocks suffering broadly over concerns of intervention in Syria, and energy lending support on the higher price of oil, only to have the U.S. come in, and rally, led higher by energy stocks. The high weighting of energy stocks in the US certainly helps markets shrug off what’s been going on, and has done historically, too. Bank of America/Merrill Lynch has done a study into the effect of oil price spikes on asset returns, and the results are a bit surprising.

While equities underperform during oil price spikes, the downside, in absolute terms, is limited. During the Arab Oil embargo in 1973, the price of Brent oil increased by 237 percent. U.S. equities slipped just 2.8 percent. U.S. stocks rose during the Iranian revolution and the Iran Iraq War, and only the Iraqi-Kuwait in 1990 caused a technical correction (a fall in excess of 10 percent). It’s also been pointed out by Thierry Laduguie at e-Yield that with the last Iraq war, “when the war started in March 2003 the stock market rallied strongly, that was the start of the bull market from 2003 to 2007”.

The market is unsurprisingly nervous that a thus far geographically concentrated, dynamic equilibrium of intense suffering for a country could turn into something else, the consequences of which are unknown. Syria to date, while a horrible situation, has posed limited downside to the profit margins of European listed countries, and what downside it posed was felt two years ago. Rising oil prices would be bad for a lot of companies. But, given the limited effect of previous spikes, and the fact it’s taken just the rekindling of Vodafone/Verizon talks for the market to shrug Syria off for the moment, it’s worth bearing in mind who the gas attacks were actually horrific for.


Carney at the TSC – and it impacted the FTSE

Mark Carney finally gave his eagerly anticipated testimony to the Treasury Select Committee today, and it confirmed to me something that I’ve been thinking about for a while – that the appointment of Mark Carney as the new Bank of England Governor could have a major impact on the UK stock market. That sterling rose when he seemed cooler on easing than investors thought isn’t the biggest surprise, but sometimes people doubt that the stock market is so sensitive, being composed of many constituent companies with their individual earnings profiles which are so much more than just a proxy on monetary policy (and so detached from the condition of the domestic UK economy). Today’s stock price movements did suggest sensitivity to what he was saying, however, from weakness in the banking sector to the minute by minute chart of his speech and price movements. The picture was muddied by the conflation of his written answers and what he was saying in both media reports and investor reaction.  But the combination of at least the use macro-prudential tools to tackle asset bubbles without raising interest rates and his scepticism over QE could have interesting effects on stock prices, and potentially pressurise them in different directions. Have to shoot now: the market report I wrote on this today is here, but more soon on this, I promise…

Democrats staying one step ahead of the blame

A Reuters/Ipsos poll late last week reiterated what has been true for the majority of the time that this fiscal cliff saga has rumbled on: that if the USA goes over the fiscal cliff, the Republicans will be blamed more than the Democrats.

It seems like this fact has conditioned a lot of the Democratic approach to negotiations, sitting back as Boehner fails to come up with a proposal that even his own party will sign up to, portraying the GOP as a party which is behind the times when it comes to progressive taxation, and a party which is ignoring the will of the majority following Obama’s re-election.

This is very much like the Democratic approach to the FY 1996 budget, where Clinton and Gingrich went head to head. Clinton was prepared to resist Republican demands, even if it meant shutting down federal government, and was unwilling to sacrifice popular federal programmes so long polls showed that Republicans would get the majority of the blame for any shutdown.

Tell Newt To Shut Up! is the definitive guide to those winter ’95 budget negotiations, and quotes a conversation between a senior Republican (perhaps Dick Armey – though don’t quote me on that) and Vice President Al Gore. The Republican tells the veep that his party are willing to shut down the government unless the Democrats agree to their proposed spending cuts.

“Our numbers show that if you do that, you guys lose,” Gore replied.*

That dynamic has been very much at play in 2012 too.

* At least approximately. It’s not online and I don’t have a copy of the damn book. Wanted to get the blog out before the deadline (it’s late enough as it is) but if anyone knows the exact quote or has the book (I think it’s p. 146) then let me know…

Fiscal cliffhanger

I’ve been following, albeit not blogging, this one closely, not least as every market report of the last month or so has had to explain what it is and what it means. I’m going to assume some knowledge and just note a few particular aspects about it. There’s an idea doing the rounds that there isn’t too much to worry about because, as neither Democrats or Republicans want to raise taxes, they’ll let the automatic tax rises happen, then strike a deal, so they can claim credit for “cutting” taxes for the bottom 96 percent rather than raising them on the top 4 percent. As they is the possibility of retroactive application of these measures, then the crisis can be averted after the deadline and still avoid the cliff’s full force. It seems like quite a big fuss to cause for a basically semantic point – sure, incumbent Republican Representatives may have right-wing  primary challengers to fear more than anyone for the next election, but I think most people know the difference between an expired tax-cut and a tax raise. True, Ezra Klein points out that Democrats do actually want to raise some taxes, but then so do Republicans. So it’s a question of which taxes are being raised, and who will bear the brunt, so I think there are still substantive issues to overcome, and the idea that a deal will be straightforward once the deadline expires is simplistic (even if it does instill a sense of urgency).

The thesis that there is a mutually beneficially desire for Dems and the GOP to cut taxes after a rise rather than pre-empt the rise (and so the fiscal cliff with have limited impact) is interesting, however, because of how recent this it is. No-one was entertaining thoughts of retroactive tax cuts and technical tactical maneuverings two months ago – if you spoke to to analysts and traders, the majority would say that they anticipated a deal with time to spare. This meant that stock markets, which have already seen impressive gains for the year, could push on – especially in Europe. Yet at the same time the good news of a resolution is not seen as priced in, so a resolution, it is anticipated, could see prices spike higher. Even U.S. indices, which haven’t seen gains in December, don’t really seem to have the bad news priced in (S&P 500 is up 12 percent on the year). And as the deadline closes in, stocks may finally be easing off on gains, but people in the market are still inventively coming up with new reasons why a deal isn’t getting done, and new reasons for longer term optimism. And I’m not saying they’re wrong to, it’s just interesting that had you put it to them two months ago that we’d have 2 business days til New Year and no deal, I think they’d have been less phlegmatic about it.

The underperforming FTSE – set to rebound?

See my piece here. The FTSE’s underperformance in the last year is rooted in two main factors: that it has a defensive skew, which mean it naturally rises less in rising markets, and the fact that the rising market itself has not been driven by those cyclical sectors that it is more heavily weighted in. That means that the last year has been the perfect storm for the FTSE to lag.

The converse is therefore also true, and moving into next year, the FTSE could find itself a winner whatever the weather. If miners rebound, as is expected, then that will benefit the FTSE disproportionately but also if the global growth outlook darkens and the “Draghi put” runs out of steam, with the euro zone debt crisis re-intensifying and hammering financials once again, the the British defensive skew should also help it out.

As China sees a soft landing, a certain amount of cyclical rotation into miners seems likely, which may dampen enthusiasm for financials even without renewed crisis. Fund flow data reflects this. And while the perfect storm that has hampered the FTSE could carry on into the first part of next year, the bets on the FTSE falling are being reduced by even more than my story says, with Karl Loomes, Market Analyst at Astec Analytics, informing me yesterday that over the past 30 days there has now been a 54% decrease in shares being borrowed on the FTSE– far outstripping European peers.

Euro zone banks: cheap for a reason

Yesterday my piece for Reuters on Euro zone banks finally hit the wire; you can read it here. A few more thoughts on the sector, which have obviously had a tough time, with first the financial crisis and then the euro zone crisis clearly not being the ideal cocktail for the euro zone’s financial and banking sector…

When any company trades below their accounting value, the market is pricing in some pretty serious tail risk. Draghi’s July speech seems to have removed that tail risk; so what’s holding them back? There’s a whole plethora of issues, including regulation which will jack up capital requirements, as well as the sense that bank’s balance sheets themselves may not tell the whole story, as Neil Dwane says in my article. But there’s also a sense that the rally of the summer has brought prices to a position where by recent standards banks are expensive, despite being below 1 on price to book. There’s a sense that, according to a recent JPMorgan survey, funds are, in terms of recent history, actually overweight; that is to say, because funds have been underweight on banks for so long, that they are now slightly less underweight leaves them holding more banks than at any time in recent history.

The implication is that seeking the usual valuation plays in examining price/book ratios is misplaced, because the risks that remain in the sector are enough to suggest that other stocks or assets just offer better risk-reward returns. Alan Higgins, CIO at Coutts, said he favoured Spanish banking corporate debt, with +10% yields and priority for repayment in worst case scenarios. People like Dwane or Stefan Angele see banks as very unattractive given other sectoral plays to be made.

Being below book is no longer enough to offer a compelling valuation play; the sector has to provide a good news reason why you want to bet on bank growth. That so much of the rally was fuelled by hedge funds closing out shorts on the sector means that, now these hedge fund have finished, investors have to make active decisions that euro zone banks are going to actively outperform other assets on the table. And at this point, not everyone is prepared to make that leap.

renewed intent

It seems that most of my posts of recent months have concerned my lack of posts, which is something I now aim to put right. After a fairly hectic (and blogless) summer, I’ve now got a job at Reuters, working on the markets desk in London, specialising in stocks in Europe and the UK. So alongside my pieces for Reuters I aim to keep the blog-only content ticking over, perhaps with a renewed markets focus but also with a continued eye on the politics of Europe, Africa and the United States. All strictly inline with Reuters policy and principles, of course…