Belt and braces will help hold London up in world Financial terms.

Looking back over my last few columns and reading the mainstream press one would be forgiven that the only story of any import is the standoff between Europe and the UK. It is not. Let us cast a glance over the top of Europe further East to China and learn how a country that views 2017 too soon to judge the effects of the French Revolution has embarked on a grand plan for their future the like of which is at least the equal of Marshall aid and in truth much greater.

The Chinese have embarked on building an infrastructure the like of which the world has never seen a new silk road. The original Silk route was the trading artery  upon which traders embarked on till the end of the 14thc which reached  ended in Andalucia where the Eastern world met with the moors that were ruling much of Spain. It is difficult to get hard and fast routes attached to the new “road” but it seems to reach across via Turkey through Northern Europe to Rotterdam from which it drives down to Venice where it meets the Maritime silk “belt. The belt connects Europe to The Arab World, then onto the African  and  back through India , Indonesia and the Malacca straits to Mainland China. Despite large investments having been made in Spain, around Valencia, it seems destined to have that area only as a secondary ports. Another great investment by Europe.

The vision and ambition is breath taking and the benefits, at last initially, are clear to see from both sides. China can suck in all the raw materials it needs to support its extraordinary growth whilst using the same route to export finished goods. Similar in many ways to Great Britain when we had an Empire. We imported the raw materials from the Empire to manufacture goods and then exported the finished goods. To digress slightly I have always thought a story about my father exemplified the way we thought …He imported Kangeroo skins from Australia and manufactured a Koala Bear soft toy from them and then exported the said toys back to Australia. Now that’s arbitrage .Sadly one only has to go the old docks around Canary wharf to get an idea of the breadth of our earlier ambition. Sadly because the wharves are mainly flats now. I suppose its sweet justice that Canary Wharf is one of the leading centres in the World for financial arbitrage.

The cost estimates on the building of rail tracks etcetera are not clear but what is clear is the reported $900bln set aside by the Chinese Development Bank to work on infrastructure projects. As yet I have heard no “if you don’t pay us billions you won’t have access to the Silk Road” so is it safe to presume that Europe is too busy looking at its own naval to have looked East and presumably the Chinese are too bright to be relying on Europe for its trade or forcing countries into trade agreements. The new routes for transport will help boost local economies and thus help China export and I suspect the RMB , London is the global centre for its trading, will become a more widely traded currency against all the countries the route touches and the route goes through countries that account for 29% of the World GDP ( Source HSBC). President XI has stated he was wishing for $2.5 trillion of trade along the road within a decade. But where does this leave London and the USA?

London has played a key role in the financing of these ambitious plans and will continue to do so whatever the outcome of Brexit. The UK has a long history of interaction with the Chinese (admittedly not always in a manner we should be proud of see Opium) and retains close ties especially through Hong Kong where we are seen to have behaved honourably by the Chinese. Our ambitions also explain the lengths that the present government has gone to in building relationships with China. We also maintain ties through such lauded names as HSBC (some forget that Hong Kong and Shanghai Banking Corporation is its full name ), Standard Chartered and Jardines. History may not be fashionable but is of great importance to China and should not be underestimated. When it comes to helping finance the infrastructure of this reported trillion Dollar project the fees generated by the undiminished prowess of London will provide a timely boost to our post Brexit finances.

Where does this leave America? It’s hard to see its role or place in this project. No doubt Goldman Sachs will dip its tentacles in but when you look through the banks and advisors that are being used, apart from The World Bank, I could not find an American name. Not only is America missing out on a slice of some gargantuan fees but by its very location it cannot be part of the adventure. As yet very little has been said on this but I wonder if there is some politicking going on with Donald Trump using North Korea as  leverage in some way ?

A new silk road and sea belt that benefits Europe and in particular the UK is fantastic news and a subject no doubt I will revert to again in months to come but is it all gladness and light? The Chinese are suffering a bout of indigestion with their internal markets and as the 10 year bond yield continues to flirt with 4% we may be seeing the start of a marked slowdown there. If you had invested $1000 in Chinese 10 year last year that investment would be worth approximately $650 now and that’s with very little currency movement and this move would make private investors nervous but I doubt it will slow down the likes of the EBRD and the Chinese Commercial banks investing. As the Chinese proverb says Bú pà lù cháng zhǐ pà zhì duǎn – which translates as Not fear a long road; fear aspiration to start or as we more prosaically say Rome wasn’t built in a day.

The Reds are back under the beds!

The Russians are coming, The Russians are coming!

By Richard Matthews November

October is historically seen as a month for stock market upheaval driven by institutional traders finally being back from their long summer breaks to face the slew of corporate earnings and markets that have been puffed up through light volume. Indeed yet another anniversary of the first great crash of modern times passed recently when the thirtieth year since the ’87 dump rolled by. A momentous day of which I have already written and a day which has kept us scribblers happy and in work as we are guaranteed an article about it on a fairly regular basis. If October is the month for market crashes what is it about November that makes fermenting revolutions finally boil over?

A year ago this week a revolution, or what felt like it at the time and on occasions since, took place in America with the election of Donald Trump. I am leaving the reflections on his first year in power toXXXXXX and instead take a look back a bit further in time. In the United Kingdom we celebrate November 5th every year with firework shows and bonfires, on top of which effigies are sat and burnt. When I was a kid we used to make these effigies by stuffing old clothes with straw and go round the streets with them crying “A Penny for The Guy”. The Guy in question was not just slang it was referring to Guy “Guido” Fawkes a Catholic plotter who attempted to blow up Parliament in 1605 as a protest against religious discrimination. There seems something prescient about the date and the problems that the UK Parliament is facing now but there are two more revolutions in November which I think are more noteworthy at present.

In November 1917 Lenin finally let loose the revolution that had been brewing since the Kronstadt sailors rebellions earlier in the year and the Bolsheviks grabbed power in what was to eventually  become a government of unrelenting bloodletting, cruelty and famine for the next seventy two years till another revolution set the oppressed peoples of Eastern Europe free. This revolution is symbolised by the fall of the Berlin wall on 9th November 1989. A remarkable series of calendar coincidences, as a market man I always like to try and create a picture from scraps of news and all I can really think of that drove these revolutions is that in November winter is coming and the fear of cold and hunger pushed people over the edge. But is there a connection between the two Russian revolutions and the election of Donald Trump? An easy narrative indeed is to blame media manipulation by the Russians for his election and this is being followed with vigour by Clinton’s acolytes but as yet little hard evidence has emerged.

We all need someone to blame

Growing up in the early 1960’s we were schooled to fear Russia and the threatened nuclear holocaust and films such as “The Russians are coming, The Russians are coming “played on our fears whilst poking fun at how they were being hyped up. Now again 50 years later it seems that the mainstream media is blaming events that they don’t agree with or can’t fathom on the Russians. Events from Brexit through to the hacking of corporate information are blamed on those pesky Russians using little or no evidence. The ongoing sex and sleaze revelations in the UK Parliament are apparently  inspired by the Russians not the endemic sexism in Parliament where it appears that behaviour more akin to a 1970’s sitcom has been the norm. If this is all a plot to unseat the present government and replace it with the loony left it presumes a level of sophistication that many would say is beyond the KGB.

When I used to miss a trade I would look around and find someone or something to blame for my own shortcomings and normally it would be the closest and easiest thing that got my ire. Often , and I’m sorry David Thomset and Jamie Lear but  it was the runners standing nearest to me that got the sharp edge of my tongue or on rare occasions a telephone thrown at them . I didn’t really look for the real problem (my own idiocy) and it feels like that is happening now enabling the real culprits and the real driving factors to hide. Coincidences and the stories we draw from them drive the markets as they do life and now one sees China with its silk belt of communication threatening to dominate Eurasia whilst America paints Russia and North Korea as the devil to deflect away from its loss of influence in Europe. Spain and Europe blame the Russians for the Catalan Crisis when they should really be looking at themselves. The UK media ignores that the Channel Island based owners of The Daily Telegraph have lost a £1.25bln court case to HMRC and  **is this libellous? looks East for someone to take the blame for the leaks and sleaze emanating from Westminster which could eventually cause the enfeebled Conservative government to fall.

Whether movies imitate life or the other way round I am never really sure but I am sure that although “The Russians are coming” is a slightly dated movie now it still has some great performances, good laughs and makes a relevant point. The plotline is about a Russian submarine running aground off the coast of New England and this mishap being exaggerated until a full scale invasion of America is feared. After all the laughs the point that stays is that rational thinking and actions demand hard evidence and this is true now, more so than ever, in a world and in markets where a rumour becomes fact as soon as it is on Twitter.

Richard Matthews, who began his career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5

This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk

My head in my hands

The world is a dangerous place and its too dangerous  to trade

By Richard Matthews November

Sometimes, most often when I’m watching the News on TV, I sit with my head in my hands. Literally with my head in my hands, rocking back and forth muttering I can’t believe it. I’m know my father was the same , indeed I can remember when The Rolling Stones  first appeared how outraged he was by their music , dress and in particular their hair. I of course laughed at the fuddy-duddy attitude but now I find this laughter comes back to haunt me. The News is often old news to those of us lucky enough to work in the markets and in reality the truth is that if it’s on TV or in the papers the markets know already and it can be a good indicator to reverse a position but none the less it’s often a head rocker.

I started rocking gently this week as the situation in Catalonia unfolded. I wrote recently about the dangers that were present in the Spanish government’s head on collision course with the independence movement. Why didn’t the Spanish government offer a legitimate referendum to the Catalans at some point in the not too distant future and offer concessions on some of the tax issues and in doing so avoid confrontation? Where were the great European leaders trying to resolve the problem? Abrogating responsibility or complicit? Hard to know. And as the story continues to unfold and words such as rebellion are bandied about I feel more uncomfortable but having lived in Spain, a country I deeply loved, I am not totally surprised by the intransigence of the people. What does surprise is that no one has suggested the use of Bitcoin as an alternative currency to the Euro in Catalonia or am I not alone in this thought as Bitcoin hits new trading highs?

Surely Bitcoin is the perfect solution for a newly independent country? I accept the fact that it is somewhat volatile on the markets and that the spreads are wide but wouldn’t that be the same for any new currency? With the CME announcing “Bitcoin futures “ any newly independent country would have a reference point for its currency which is a lot more than many could have hoped for or indeed many countries have . With hundreds of millions of dollars going into ICO’s in exchange for “tokens” it is understandable that the CME sees a market but it does feel premature, however if  a newly independent country with good exchange flows adopted Bitcoin, or similar it could prove to be a very precipitous move .

Whether Bitcoin, Etherum , Ripple or some yet to be invented crypto-currency  is adopted by a country is looking into the future and of course it raises the spectre of how Central Banks would react to a currency they can’t tax . Central Banks were once revered as the fonts of all knowledge even after pushing much of the Western World into several deep recessions in the last century and there is a case to be argued that perhaps an economy without their interference would be better and that is what you would get from a crypto currency. When you look at some of the interest rate moves, through hindsight, the over reactions are almost laughable. It now beggars belief that we worshipped slavishly at the feet of Volcker  when he oversaw an economy, apparently interlinked with interest rates, that saw moves to 20% in 1980.In many ways it feels the reverse now where we have had the fool’s gold of QE and overly low interest rates imposed for almost a decade , creating zombie businesses and over inflating asset prices . Did nobody look at the dotcom bubble of 1997 to 2001?

 

 

Is the Sun setting so soon on President Macron?

Having recently been in the South of France where the asset inflation bubble has certainly affected restaurant and hotel prices, if nothing else, it was interesting to see how Macron, presented to the outside world as the saviour of France, was fairing. From the outside all is serene and as beautiful as ever but two little vignettes struck me. The first was on boarding the train at Cagnes-sur-Mer  that there were metal detectors being installed at the entrances to the platform which was somehow incongruous with the faded charm of the station but coupled with security guards on the platforms made for a slight unease. For those not familiar with Cagnes’  location it lies between Nice and Marseille so perhaps these precautions are reflective of the perceived threat of terror. It’s so sad. The fact though which struck home was that having waited an hour for a local bus service we finally gave up and took a taxi back to the hotel and when we asked if the Bus had perhaps been involved in a crash we were told, with a classic Gallic shrug, that this was France and there are always strikes. Perhaps all is not quite as well as we are led to believe.

Are these domestic problems, by which I mean mainland European problems, at last, having an effect on Europe’s negotiating position with the UK which at last seems to be softening? It does feel like a sea change is happening and whether this was caused in part by May’s conciliatory speech in Florence or by the recent European Council meeting is not clear but there does seem light at the end of the tunnel which hopefully is not the proverbial Guerrilla with the flashlight. Mrs Merkel certainly seemed to be courting Mrs May at last and being the adept pragmatic German that she is it may well be that the penny has at last dropped that she has a tough choice – deal fairly with Mrs May or she faces Boris Johnson and the real possibility of a no deal walk away scenario which possibly hurts the Germans more than anyone else in Europe and in particular the car unions that support her.

As I write this I hear the news in the background where Catalan leaders are arrested, British Parliament is in chaos over a sex scandal and Donald Trump is under attack over purported links to Russia. In the meantime I am told that I shouldn’t ask people where they come from and to be honest I’m afraid every time a girl pushes past my gargantuan stomach on the tube in case I’m accused of sexual harassment . When I move my hands from my face into a more moose like position I see The UK, Europe and The US all with rebellious subjects, Rocket man with his finger on the button whilst stock markets hit new highs and there is talk of 16 year olds getting the vote, bonkers in my opinion. This all makes calling the markets really difficult as they are now politicised and currencies and stock markets are over reacting as a factor of a thin market and in these times the wisest move I am making is when I move my hands from my face I place them firmly under my backside and leave trading to the fools.

Almost Right

Bank of England Policy c. 1982 and One-Eighth Rate Moves

 

The last time the Bank of England (BoE) raised interest rates was on 5th July 2007, less than three months before Northern Rock went under, when its Monetary Policy Committee (MPC) hiked by 25 basis points to 5.75pct .Hindsight is a wonderful thing but  looking back its quite shocking how the Bank raised rates whilst the interbank deposit markets were freezing up. Almost as if they wanted to put the final nail in the coffin of these Northern Upstarts.

 

Thereafter, the MPC steadily sliced rates to the current 0.25pct, a record low set post-Brexit on 4th August 2016. While I recently wrote about the 10-year anniversary of Northern Rock, the 10-year anniversary of the Bank’s last rate hike came and went. But let’s be clear: it’s now more than a decade without any rate hikes, which even to an old-hand like myself is an extremely long period, the consequence of which is that there is a whole generation of traders and brokers who have never lived through a UK tightening cycle. Also lost through the sands of time is the bank’s extraordinary policy between 1979 and 1982 that hold a few clues on what Carney & Co. may do next as they ponder an increase.

 

The early ‘80s were not just a world of flash cars, shoulder pads and big hair. It was a world where London was adapting to open-outcry trading, with our colourful trading jackets we proudly wore often banned from restaurants and bars. The City was not ready for the future. Back then, three old stockbrokers in a champagne Bar called The Greenhouse complained about my appearance only to be told by the legendary local Alan Dickinson: “We are the Fffing future”. As open outcry trading took off so did Inflation it had returned by the late ‘70s and with it the use of interest rates as a way to control it. Governments slavishly followed the monetarist Milton Friedman and the Fed funds rate touched 20pct (not a typo) whilst the Bank rate in the UK peaked at 17pct.

 

ONE-EIGHTH OF A PERCENT RATE MOVES

 

What happened? We tipped over into a deep recession – almost as deep as the one we have just experienced. Interest rates were initially slashed in 1pct and 2pct moves, and then increasingly slowly until the bank often moved in 0.125pct steps. Or one-eighth of a percent – read and digest. Rates eventually reached the low of the cycle on 2nd November 1982 at 9.1250%. (http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp)

 

Carney and his cohorts face a different economy, world and set of traders when the MPC meets next Thursday 2nd November 2017, but there is a strong argument for caution from the doves on the committee who may suggest raising rates by 0.125pct versus the widely anticipated 0.25pct.

 

Some City analysts think this highly unlikely, like Adrian Schmidt, head of analysis at FX Economics.

 

“It would smack of indecision and half measures and lead to a weaker pound which the bank seems to want to avoid, though personally I think a weaker pound is probably needed,” he said.

 

“I don’t think any central bank would consider such a small move,” said Keith Grindlay, global macro strategist and author of advisory Macro Thoughts UK. “Though there were rumours when the ECB was cutting…and central banks are good at surprises.”

 

Carney himself dismissed such a scenario when LiveSquawk News asked him this very question at the bank’s last press conference.

 

However, Carney would be able to appease both doves and hawks with such a move. By nudging the base rate by a fairly nominal amount, remember 0.25pct doubles them, he can show that he is acting prudently in being gentle with the fresh shoots of growth whilst ushering out the era of ultra-low rates. That cycle is at an end and we are moving gently towards a norm of maybe 2.5pct. An eighth may also be a gentle introduction for those virgin up-cycle traders who, without doubt, will be wrong-footed whilst us old boys will do as always and ”buy the rumour and sell the fact”.