Canada takes a hike
July 13, 2017

Mint - Blain's Morning Porridge

Methinks we worry too much. Canada hiked interest rates for first time since 2010 yesterday. The Loonies (Canadians, and not a term meaning they are moonstruck idiots, but a reference to their dollar coin) tend to track the US quite closely – the Bank of Canada follows the US Federal Reserve.

The next phase will be the sequential follow-on by the rest of the globe's central banks as they each step in line. The last few weeks confirm global central bank policy in now on a hawkish tack – it's about ending extraordinary monetary experimentation, normalization and higher rates. So bond prices have fallen and yields are higher. Get over it.

There are still many flies in the ointment – most notably wage inflation just ain't apparent – but it's happening. The only questions are when and how fast.

Bear in mind: Fed Chairwoman Janet Yellen's testimony yesterday confirms the Fed's pace of interest rates rises will be: "lower for longer"!

What does all this mean in terms of the right investment stance? I think the word to use is soft. For once, there may be less to panic about than we think.

When explaining why markets move, I often think they are a bit like sailing. When the wind starts to blow it's time to take in the sails by hiking interest rates. When it's calm and flat, it's time to put up bigger sails (cut rates) and even put the engine on (QE).

When Yellen uses words like "slight to moderate" she wasn't talking about the sea-state...but painting a picture of sluggish growth that's too weak to justify a hike or other shocks. To keep the ship moving it's time to keep the sails full, but keep a weather eye on what the wind does next. As soon as the wage numbers justify it, or growth strengthens, maybe a modest hike to reduce sails and keep them under control.

After yesterday's testimony the US dollar slid, bond yields fell as stocks rose – exactly what we'd expect, while the Loonie went up reflecting the Canadian hike. It was pure Economics and Markets 101.

Not everyone believes it. I'm hearing a number of big names are looking at the calm quickly turning into something less pleasant, and bonds becoming more volatile. A number of blogs talk about a large treasury straddle put on for July 21 – a bet the ten-year US bond moves up or down significantly! Interesting.

Might happen. Thin markets and such, but does it mean the end of world? (I suspect someone playing a political game on Trump's current embarrassments rather than fundamentals.) Relax. Breathe deep. Surprised as I am to say it...markets are calmer than many think.

On the other hand, I was also talking to traders yesterday who think the current instability in the UK due to political and Brexit fears is way overdone – despite the best efforts of buffoons, and Boris and Gove, to waylay negotiations, expect pragmatism to win out. It does look like the "Great Repeal Bill" will prove an irresistible opportunity for the opposition parties to embarrass what passes for government these days. Oh well, let the children have their fun..

On to the stock markets and I'm increasingly of the view so many people now expect a global reset in stock markets come October (a 10-25 percent crash) that maybe it's just not going to happen. Many times while racing I've reefed in my sails (made them smaller), expecting that small dark cloud of doubt on the horizon to become a storm when it's simply been a modest extra breath of wind. I have a feeling the much predicted market stramash in October could become a buying opportunity much quicker than many expect!

Still thinking about this – the cloud is right there on the horizon...just can't tell what's under it or if it's coming our way. Meanwhile...investment bankers are swarming all over Athens, trying to persuade the Greek treasury to award them the mandate for Greece's return to the bond market! (We know, we know, but we're not allowed to tell you.) But, won't the launch of a new Greece deal be an exciting moment? We're expecting a five-year deal with a coupon around 4.5 percent next week – after the Bastille Day slowdown.

No matter what you think or I say about Greece, I confidently expect the new deal will be a massive blowout success. Forget whatever tattle you've heard about domestic government instability, or bailout number four in the wings, the new deal will have that great big tasty four handle-plus coupon you just can't resist….

There is a great story in Handelsblatt: The German Greens think it morally indefensible the German state has earned some EUR 1.3 billion from Greece's financial shenanigans over the past decade! KFW netted some EUR 393 million from a loan made in 2010, while the Germans have receive a share of Greek interest and profits from the securities market programme that expired in 2012 and bonds held by the European Central Bank.

EUR 1.3 billion won't particularly help the Greeks – they have outstanding debt of EUR 240 billion. Nor do the Germans actually need the money. The German surplus in 2016 was over EUR 6.2 billion!

Anyway, out of time..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

Methinks we worry too much. Canada hiked interest rates for first time since 2010 yesterday. The Loonies (Canadians, and not a term meaning they are moonstruck idiots, but a reference to their dollar coin) tend to track the US quite closely – the Bank of Canada follows the US Federal Reserve.

The next phase will be the sequential follow-on by the rest of the globe's central banks as they each step in line. The last few weeks confirm global central bank policy in now on a hawkish tack – it's about ending extraordinary monetary experimentation, normalization and higher rates. So bond prices have fallen and yields are higher. Get over it.

There are still many flies in the ointment – most notably wage inflation just ain't apparent – but it's happening. The only questions are when and how fast.

Bear in mind: Fed Chairwoman Janet Yellen's testimony yesterday confirms the Fed's pace of interest rates rises will be: "lower for longer"!

What does all this mean in terms of the right investment stance? I think the word to use is soft. For once, there may be less to panic about than we think.

When explaining why markets move, I often think they are a bit like sailing. When the wind starts to blow it's time to take in the sails by hiking interest rates. When it's calm and flat, it's time to put up bigger sails (cut rates) and even put the engine on (QE).

When Yellen uses words like "slight to moderate" she wasn't talking about the sea-state...but painting a picture of sluggish growth that's too weak to justify a hike or other shocks. To keep the ship moving it's time to keep the sails full, but keep a weather eye on what the wind does next. As soon as the wage numbers justify it, or growth strengthens, maybe a modest hike to reduce sails and keep them under control.

After yesterday's testimony the US dollar slid, bond yields fell as stocks rose – exactly what we'd expect, while the Loonie went up reflecting the Canadian hike. It was pure Economics and Markets 101.

Not everyone believes it. I'm hearing a number of big names are looking at the calm quickly turning into something less pleasant, and bonds becoming more volatile. A number of blogs talk about a large treasury straddle put on for July 21 – a bet the ten-year US bond moves up or down significantly! Interesting.

Might happen. Thin markets and such, but does it mean the end of world? (I suspect someone playing a political game on Trump's current embarrassments rather than fundamentals.) Relax. Breathe deep. Surprised as I am to say it...markets are calmer than many think.

On the other hand, I was also talking to traders yesterday who think the current instability in the UK due to political and Brexit fears is way overdone – despite the best efforts of buffoons, and Boris and Gove, to waylay negotiations, expect pragmatism to win out. It does look like the "Great Repeal Bill" will prove an irresistible opportunity for the opposition parties to embarrass what passes for government these days. Oh well, let the children have their fun..

On to the stock markets and I'm increasingly of the view so many people now expect a global reset in stock markets come October (a 10-25 percent crash) that maybe it's just not going to happen. Many times while racing I've reefed in my sails (made them smaller), expecting that small dark cloud of doubt on the horizon to become a storm when it's simply been a modest extra breath of wind. I have a feeling the much predicted market stramash in October could become a buying opportunity much quicker than many expect!

Still thinking about this – the cloud is right there on the horizon...just can't tell what's under it or if it's coming our way. Meanwhile...investment bankers are swarming all over Athens, trying to persuade the Greek treasury to award them the mandate for Greece's return to the bond market! (We know, we know, but we're not allowed to tell you.) But, won't the launch of a new Greece deal be an exciting moment? We're expecting a five-year deal with a coupon around 4.5 percent next week – after the Bastille Day slowdown.

No matter what you think or I say about Greece, I confidently expect the new deal will be a massive blowout success. Forget whatever tattle you've heard about domestic government instability, or bailout number four in the wings, the new deal will have that great big tasty four handle-plus coupon you just can't resist….

There is a great story in Handelsblatt: The German Greens think it morally indefensible the German state has earned some EUR 1.3 billion from Greece's financial shenanigans over the past decade! KFW netted some EUR 393 million from a loan made in 2010, while the Germans have receive a share of Greek interest and profits from the securities market programme that expired in 2012 and bonds held by the European Central Bank.

EUR 1.3 billion won't particularly help the Greeks – they have outstanding debt of EUR 240 billion. Nor do the Germans actually need the money. The German surplus in 2016 was over EUR 6.2 billion!

Anyway, out of time..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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