Subtle shifts in direction
July 26, 2017

Mint - Blain's Morning Porridge

Apologies for lack of comment yesterday, but my computer decided to auto-destruct just as I was about to send it out. Despite many reports saying markets are now in full holiday season, there's still plenty of serious stuff still going on, and some subtle shifts in direction to figure out.

· Stuff to watch today: US earnings season (it's a massive week) as stocks hit new highs, and what the Federal Reserve will say tonight (still watching and waiting).

· Stuff to think about: The implications and consequences of the return of Greece to the bond market. Tech stocks – Google (Alphabet) in the spotlight. What are central banks really telling us and what do they actually know?

Starting with the Greek bond. The new EUR 3 billion five-year Greek bond deal was a predictable success the authorities are crowing about: oversubscribed by a factor of 2 and a tight-ish coupon of 4.375 percent. The plan to reduce the funding load in 2019 (by buying back more expensive 2019 bonds) didn't get as much uptake as expected. The upside is it establishes a two- to five-year curve for Greece – something the Government can build on ahead of exiting the EU/IMF bailout in 2019. They're already talking about the next deal…

Does this mean we can forget about future Greek crisis? Does this one bond issue a glorious summer foretell? Nope. Whitewash. After talking to accounts, we reckon the deal has fallen into something of a no-man's-land on the investment landscape.

The distressed/high-yield/ultra emerging market players were not particularly active – they see the Greek story as done (for now) and therefore little further upside of the magnitude they typically look for. (If/when we get another Greek wobble, then they will be back.) It's not a name that fits sovereign bond investors – still far too much "whoosh" associated with Greek risks for them.

That then leaves a narrower band of credit players looking at the yield dynamics and where to fit it into portfolios. And the Greek domestic banks were the big holders of the 19 bonds. A good number of investors just weren't interested – Greece is not, and will not be, on their investment horizons.

I wonder if there is sufficient market capacity for the market to replace the EU and IMF as the prime funders of Greece's EUR 315 billion of debt? (That number includes the EUR 225 billion of bailout funding.) For the next ten years, the debt repayment burden is comparatively modest (after the 2012 settlement) at around EUR 8 billion per annum – which doesn't address the bailout monies.

I suspect Greece remains wedded to ongoing EU support into infinity - meaning Greece will remain a festering pustule on the otherwise unblemished face of Europa for many years to come.. (US readers – mild sarcasm alert.)

For Greece to exit its never-ending crisis depends on many factors. Can the economy finance sufficient growth? Unlikely. Austerity remains on the cards. Following massive recession and contraction the shrunken Greek economy has survived the crisis, but will require significant reinvestment to restructure and rebuild. Where will it come from? Greece is not a sovereign borrower in its own right – it's a eurozone credit, unable to run the printing presses, and likely to remain entirely dependent on EU largesse.

Another issue is the blithe assumption that Europe, as a whole, is fixed – as witnessed by the current economic recovery. What economic recovery? Sure, the numbers are slightly better, confidence is higher (spectacular German IFO numbers yesterday) and unemployment is dropping. But Europe remains deeply troubled – and youth underemployment is a scandal. Should the current strength of the euro, (and the relative weakness of the dollar), cause wobbles in current European outlook of an economic "miracle" (US readers – another sarcasm alert), then the next tick in Europe is down – with magnified effects on Greece.

We're also likely to face further Greek political ructions – parties trying to show they run an independent country, when in fact they are tied closely to what Brussels/Frankfurt allow. That's not a recipe for success. A number of commentators say yesterday's bond issue will reduce the pressure on the current government, and allow Greece and the EU to declare victory – but we know that's utterly hollow. The next Greek radicals are around the corner. Below the surface, the pressure on Greece continues to build.

Even after stripping out the EUR 225 billion of bailout funds, Greece has a horrendous repayment schedule to meet, plus raising cash to keep the nation afloat. The past eight years of crisis has not resulted in a reformed country fit and ready for the hurly burly of global competition. Nope.

All the various angles of the Greek crisis are going to come back together again – sooner rather than later. And someone, somewhere, is going to figure out the downright blinking obvious: that Greece's major problem is the euro. Troubled EM nations using the wrong currency rarely works well. Ask Argentina.. hang on.. there's an idea.. Anyone for a Greek century bond? I predict we'll still be worrying about Greece in 10 years time…

Elsewhere...no point worrying about the Fed today. Lower for longer. And US stocks remain robust – the earnings season is positive and if it weren't for the Trump distractions we'd all be massively positive. Dovish Fed and positive earnings – buy stocks methinks.. the crash is still two months away.

I must get round to writing something about central banks tomorrow...

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

Apologies for lack of comment yesterday, but my computer decided to auto-destruct just as I was about to send it out. Despite many reports saying markets are now in full holiday season, there's still plenty of serious stuff still going on, and some subtle shifts in direction to figure out.

· Stuff to watch today: US earnings season (it's a massive week) as stocks hit new highs, and what the Federal Reserve will say tonight (still watching and waiting).

· Stuff to think about: The implications and consequences of the return of Greece to the bond market. Tech stocks – Google (Alphabet) in the spotlight. What are central banks really telling us and what do they actually know?

Starting with the Greek bond. The new EUR 3 billion five-year Greek bond deal was a predictable success the authorities are crowing about: oversubscribed by a factor of 2 and a tight-ish coupon of 4.375 percent. The plan to reduce the funding load in 2019 (by buying back more expensive 2019 bonds) didn't get as much uptake as expected. The upside is it establishes a two- to five-year curve for Greece – something the Government can build on ahead of exiting the EU/IMF bailout in 2019. They're already talking about the next deal…

Does this mean we can forget about future Greek crisis? Does this one bond issue a glorious summer foretell? Nope. Whitewash. After talking to accounts, we reckon the deal has fallen into something of a no-man's-land on the investment landscape.

The distressed/high-yield/ultra emerging market players were not particularly active – they see the Greek story as done (for now) and therefore little further upside of the magnitude they typically look for. (If/when we get another Greek wobble, then they will be back.) It's not a name that fits sovereign bond investors – still far too much "whoosh" associated with Greek risks for them.

That then leaves a narrower band of credit players looking at the yield dynamics and where to fit it into portfolios. And the Greek domestic banks were the big holders of the 19 bonds. A good number of investors just weren't interested – Greece is not, and will not be, on their investment horizons.

I wonder if there is sufficient market capacity for the market to replace the EU and IMF as the prime funders of Greece's EUR 315 billion of debt? (That number includes the EUR 225 billion of bailout funding.) For the next ten years, the debt repayment burden is comparatively modest (after the 2012 settlement) at around EUR 8 billion per annum – which doesn't address the bailout monies.

I suspect Greece remains wedded to ongoing EU support into infinity - meaning Greece will remain a festering pustule on the otherwise unblemished face of Europa for many years to come.. (US readers – mild sarcasm alert.)

For Greece to exit its never-ending crisis depends on many factors. Can the economy finance sufficient growth? Unlikely. Austerity remains on the cards. Following massive recession and contraction the shrunken Greek economy has survived the crisis, but will require significant reinvestment to restructure and rebuild. Where will it come from? Greece is not a sovereign borrower in its own right – it's a eurozone credit, unable to run the printing presses, and likely to remain entirely dependent on EU largesse.

Another issue is the blithe assumption that Europe, as a whole, is fixed – as witnessed by the current economic recovery. What economic recovery? Sure, the numbers are slightly better, confidence is higher (spectacular German IFO numbers yesterday) and unemployment is dropping. But Europe remains deeply troubled – and youth underemployment is a scandal. Should the current strength of the euro, (and the relative weakness of the dollar), cause wobbles in current European outlook of an economic "miracle" (US readers – another sarcasm alert), then the next tick in Europe is down – with magnified effects on Greece.

We're also likely to face further Greek political ructions – parties trying to show they run an independent country, when in fact they are tied closely to what Brussels/Frankfurt allow. That's not a recipe for success. A number of commentators say yesterday's bond issue will reduce the pressure on the current government, and allow Greece and the EU to declare victory – but we know that's utterly hollow. The next Greek radicals are around the corner. Below the surface, the pressure on Greece continues to build.

Even after stripping out the EUR 225 billion of bailout funds, Greece has a horrendous repayment schedule to meet, plus raising cash to keep the nation afloat. The past eight years of crisis has not resulted in a reformed country fit and ready for the hurly burly of global competition. Nope.

All the various angles of the Greek crisis are going to come back together again – sooner rather than later. And someone, somewhere, is going to figure out the downright blinking obvious: that Greece's major problem is the euro. Troubled EM nations using the wrong currency rarely works well. Ask Argentina.. hang on.. there's an idea.. Anyone for a Greek century bond? I predict we'll still be worrying about Greece in 10 years time…

Elsewhere...no point worrying about the Fed today. Lower for longer. And US stocks remain robust – the earnings season is positive and if it weren't for the Trump distractions we'd all be massively positive. Dovish Fed and positive earnings – buy stocks methinks.. the crash is still two months away.

I must get round to writing something about central banks tomorrow...

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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