There’s no beating around the bush – the Hamburg G20 meeting was an abject failure and a significant waste of time.
It is true, however, that a failed G20 is probably better than no G20 at all and so let’s not get too hot under the collar. If the violent antics of the so called “anti-capitalist” rent-a-mob are the price we have to pay for the jamboree then, in the greater scheme of things, it is probably one worth paying. If, on the other hand, the outcome of such summits does not improve we maybe ought to ask ourselves “What next?”.
Trump the Disruptor at least did not disappoint in as much as he stuck by his guns by refusing to take part in anything related to the Paris accord, which in turn led the other 19 to affirm their commitment to the agreement on environmental protection. Why Mutti Merkel had to highlight this as a great achievement baffles. They’d all agreed in Paris to commit themselves to the accord and telling the world anything other than that they still stood by their word might have been worth a few lines. That they do is not so why the excitement? It was all a bit like a couple renewing their wedding vows. It’s a darned good reason to get the family together for a few glasses of fizz but it really has no meaningful impact beyond that.
That Donald Trump would spend the 48 hours after his meeting with Vlad “Put me In” Putin trying to backtrack on things he is supposed to have said but now denies (even though he tweeted on the subject) comes as no surprise at all. Even before the face-to-face encounter, analysts were warning that Putin, one very old sly ex-KGB dog, would have set manifold traps for the man who loves to tweet before he has engaged the brain – and so it is turning out. All that Hamburg seems to have underlined is the apparent lack of joined up strategic thinking in the White House. No doubt Putin now has a much clearer view of how far he can push Trump around with impunity and anybody who thinks he won’t exploit that knowledge to the bitter end has not got the measure of our Vlad.
Jobs
More important though going into the weekend was the stunning June US nonfarm payroll numbers. Not only did the headline number of 222,000 new jobs created blow away the economists’ consensus forecast of 178,000 but the upward revision of the May report to 152,000 from 138,000 came as a surprise too, That said, and with the participation rate rising to 62.8% from 62.7% the unemployment rate rose, nevertheless, to 4.4% from 4.3%. Oh the vagaries of employment statistics! Some analysts were disappointed that average earnings are still only growing at 2.5% although I can’t see where the problem is. CPI is at 1.9% annually so wages are out-growing inflation. Likewise, average hours worked are also stuck around 34.5 but it would surely be hard to accommodate both higher employment and higher productivity.
Consensus is that US risk asset markets rallied sharply on the back of the strong payroll statistics but what’s a 94.3 point rally in the Dow worth on the back of 158.13 point dump the day before? Treasuries showed a little more backbone with the yield on the 10 year rising 1.9bp to 2.389% from 2.367%. We are now beginning to enter territory where the comparative returns between the S&P 500, which is 2.01%, and 10-year bonds at 3.39% are beginning to put life back into the thought of owning a few of the latter. However, if we assume that fair value for the 2s/10s curve in a market in equilibrium is give or take 100bp and if we assume that the FOMC won’t exit the current tightening cycle, albeit it one which is being implemented at a snail’s pace, until a 2.50% Funds rate has been achieved, then the 10-years also still have 8-10 points of price to lose.
With a running yield of 2.60% and a downside risk of 10% of capital, bonds are, for the first time in quite a few years, beginning to look like a viable defensive investment if one fears that the equity bubble is about to pop. This might work for the US but in Europe with the Dax returning 2.71% and 10-year Bunds still way off at 0.56%, the argument doesn’t work. Unfortunately European markets can’t multi-task and don’t seem to have much of a brain of their own so if the weighting of US investments were to take on the value trade, to shift from equities back into treasuries and stock prices were to fall, then as sure as eggs are eggs European stock markets would go into meltdown too.
Macron effect
The central banks in general and the ECB in particular are in an invidious position. Markets are looking for guidance while the monetary authorities are still trying to come to grips with macroeconomic and socioeconomic conundrums they have never before faced. The positive impact that the election of Young Macron was supposed to bring is still being waited for. The rhetoric of reining in public spending was quite clear although how it is to be practically implemented is a different matter entirely. The president can’t wave a magic wand and suddenly everything will be fine in the garden. To some extent Macron is at risk of becoming the victim of his own success as expectations are very high while on the other hand he might just be in luck in that he has been elected to office just as the momentum was beginning to change.
Unemployment in France has fallen from a high of 10.53% in Q2 2015 to 9.63% at the end of Q1 2017 and no doubt he will get credit for a better number again for Q2. Absolute numbers are less exciting with the total struggling to get markedly below 3.5m. The proposed slashing of infrastructure spending – talk is of €34bn over the next eight years – will not help to alleviate this blot on the French landscape. If Macron misses deficit targets, he will be able to put the blame on his predecessor who threw money around in his final months, not unlike Gordon Brown who stands accused of having done the same in the run-up to his being ousted in 2010. Simply put, the Macron effect is showing signs of it beginning to fade.
Bumbling Brexit
I was involved in a conversation recently, the outcome of which was that the currency to hold is the one that offers least reason to short. With the euro long trade now looking ominously crowded and with neither yen nor sterling offering much excitement, it looks as though the dollar might still be the least unloved one.
Finally a word on Brexit. There is a growing school of thought that suggests that the technical execution of the divorce of the UK from the EU is so complicated that it might be packaged in temporary extensions and other special measures that could eventually lead to it never being fully implemented. The rejection over the weekend of the UK’s proposed solution for resident EU citizens is a case in point. If no deal is better than a bad deal we might end up with just that - no deal, which could be Brexit failing to reach un-stick speed. The Brexit mess just got bigger…