Tories Abandon Fiscal Targets

Today is economy day, Shadow Chancellor McDonnell will be up later promising to spend hundreds of billions of borrowed money and raised taxes. Sajid Javid has just promised to increase spending by hundreds of billions in borrowed money. No mention of that fiscal deficit the Tories promised to close in 2015.

All this borrowing will, they both claim, be financed from the sale of government gilts at the currently prevailing cheap interest rates. The market is suspicious and interest rates will inevitably rise if the market is flooded with gilts. The world’s biggest bond investment fund is Pimco, here’s what their chief investment officer for global fixed income told the FT this morning:

“The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive. Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight”

Incidentally, the name of that chief investment officer is Andrew Balls, brother of Ed Balls. Saj knows that investors will not perpetually buy gilts at the high prices and the low yields prevailing today… 

Carole’s Short of Logic on “Brexit Disaster Capitalism”

In the wilder corners of Twitter, the remainiacs have a meta-conspiracy theory they call “Brexit Disaster Capitalism”, it has a number of components and is based on some far-fetched premises;

  • Brexit will be a disaster and lead to economic collapse.
  • Prominent rich Brexiteers know this, they intend to profit from it by selling short stocks high to buy back low after the disaster.
  • City tycoons and hedge fund managers financed the Brexit campaign to bring about the collapse from which they will profit massively whilst the rest of us suffer.

The fact that Jacob Rees-Mogg, for example, has an interest in a fund management firm is cited as proof. The latest incarnation and attempt to shore up the theory is based on the publicly-disclosed short interests of various fund managers who have given money to the Tories, Vote Leave or Boris Johnson’s campaigns. Carole Cadwalladr tweeted last night that they have aggregate short positions of some £4,563,350,000. Four and a half billion quid of shorts by Brexit-backing fund managers sounds like a huge amount. Except it isn’t in relative terms.

The UK stock market is capitalised at over £4 trillion, so that aggregate short position is equivalent to something like a tenth of 1% of the market. Nothing unusual. Long/short funds usually trade stock pairs, so the funds most likely won’t even be that short in net terms because a fund goes short one stock and hedges the position long another stock (hence the term “hedge* fund”). The profit (or loss) is from the difference in the stocks’ relative performances.

More obviously, these funds are overall net long the market, if these rapacious plutocrats were betting on disaster, why would they be positioned to profit massively when the broad stock market went up and lose when it went down? Publicly available data, for example, shows that the prominent Brexiteer donor Paul Marshall’s firm has £1.3 billion in short positions on the UK stock market. His firm manages some £30 billion of assets. Which suggests he is in reality geared to profit far more from rising than falling stock markets.

Incidentally, if the fund managers had been short since referendum night they would have lost their fortunes, given the FTSE is up over a 1000 points since the referendum. The whole “Brexit Disaster Capitalism” conspiracy theory does not make sense even if you accept the premise that Brexit will be a disaster. The hedge fund managers are long the market in the expectation stocks will continue to rise…

*The hedge might also be against derivatives or the relevant market index. To go short without hedge is to be nakedly short. A brave trade.

Strong July Growth as Recession Threat Dies

Threats of a recession in the UK have faded after the UK economy showed solid growth in July. Defying remainer expectations.

As the BBC’s Economics Editor, Faisal Islam, concedes, “strongly suggesting [a] return to growth in Q3, albeit Q3 hasn’t finished yet – so recession not looking likely”.

The 0.5% growth rate – driven greatly by construction growth – comes after a 0.2% contraction in the second quarter of the year, and marks the strongest month of growth since January. 0.3% growth is three times higher than predicted – expect more economic predictions to be defied over the coming months…

EU Exports Down Strongly, UK Exports Up Strongly

Remainers pointing to soft economic numbers in the UK should note that trade between euro-zone member states fell by 6.6% in June compared to the same period last year. That was the fastest such contraction since 2013. Exports from the eurozone to the rest of the world also dropped by 4.7%, the fastest rate since 2016. The EU can’t blame the fall in intra-bloc trade on China…

This is massively under-performing compared to exports of goods and services from the UK which grew 4.5% in June, the most since October 2016. Shipments of goods in particular surged 7.6%, driven by machinery & transport equipment. The euro looks over-valued…

Nonsense of the Disaster Capitalism Brexit Narrative

There is a belief popular with some Remainiacs that Brexit backing financiers – particularly those who donate to Brexit causes – are doing so to profit. Somehow they will make a killing when Brexit goes disastrously wrong and that is the reason why they are funding Brexit causes. The latest manifestation of this is that Crispin Odey is short* £300 million of shares in British companies, proof that he stands to make a killing when Brexit collapses the economy. Literally caught short!

Guido has not spoken to Odey for this article. It is however well known that he runs a long/short fund. A common strategy of such funds is to do pairs trades; a trader might go long Fed-Ex shares and short Royal Mail shares because he thinks Fed-Ex will do better than Royal Mail whether the general market goes up or down. Even if both shares go down he expects Royal Mail to go down more, even if both go up he expects Fed Ex to go up more. The difference between the moves – the spread – is where his profits or losses will be made. The difference in the shares’ relative performance.

Sometimes long/short funds will short a stock versus the general market. If the market goes up more than the shorted stock, they profit. The reason the financial press knows Odey is short £300 million of shares is that funds have to make regulatory declarations of short interests. They do not have to declare their long interests unless they become so exceptionally large as to be notifiable interests. However we know that Odey has billions under management. It is therefore very likely that his firm is net long the UK stock market given he has only £300 million in declared shorts. Not a position you take if you expect disaster.

Odey is often reported as having made millions from the referendum. Guido is sure Crispin is happy for potential investors to think that. However the facts are that his Swan Long/Short Equity fund lost 42.1% in 2016 and 21.8% in 2017. It has only just started clawing back losses by some 39.7% in 2018, leaving it well down since the referendum. So much for profiting from Brexit…

*Shorting is when you borrow and sell shares in the hope of buying them back later at a lower price. Hedge funds were originally so called bcause they hedged a short position against a long position.

So Much for Downing Street’s “TARP Moment”

Do you remember when Downing Street briefed the media that the defeat of the meaningful vote would produce a “TARP Moment”, and that markets crashing would push panicking MPs to vote for the PM’s deal the second time round? Just as the US congress agreed the bail-out only after markets crashed in a second vote. The theory was that the pound and equities would slide as investors priced in the likelihood of Britain leaving the European Union without a deal in March 2019. Scared of being blamed, rebel MPs would fall into line. Sterling finished the day where it started and if firm this morning, the FTSE 100 is basically flat as well. So much for Downing Street’s insight into market dynamics.

Market players clearly now expect a softer Brexit. Which suggests Downing Street has totally failed to convince observers to believe that a WTO terms Brexit is really a likely outcome…

Peston Tweet Taken at Face Value Costs Currency Traders

Peston earlier tweeted that the ERG were falling in behind May’s deal. Just a warning to Guido’s friends in the foreign exchange game. Please take Peston’s insights into the Conservative Party with a bag of salt…

Bloomberg, who should know better, reported Peston’s tweet as if it was a verified ITV News story. The newswire flashed it out across their terminals. Millions changed hands, boom and bust within minutes resulted…

UK Services PMI Jumps to 55.1

Services sector activity in the UK economy extended its rebound in the month of June, and surprised markets to the upside, services PMI jumped to 55.1 in June versus a 54.0 reading booked in June. Markets expected 54.0 last month. The survey data indicate that the economy likely grew by 0.4% in the second quarter, up from 0.2% in the opening quarter of 2018. Sterling rose against the euro on the back of the news.

Tory Ex-Minister is Working for Oligarch Named as Corrupt by Russian Opposition Leader

Former Tory MP and tree-hugging Energy & Climate Change minister Greg Barker has had a difficult start to 2018. As we previously reported in November, Russophile Lord Barker of Battle’s primary role as chairman of En+ Group was to add a veneer of respectability to reassure the City as the Russian energy and aluminium producer listed on the London Stock Exchange. Once the LSE accepted the listing, Barker must have thought his main struggles were over…

Slightly concerning then that Barker’s boss, Oleg Deripaska, is now under the cosh on several fronts. At the end of January Deripaska was named on the US Treasury list of oligarchs linked to the Russian government. Deripaska owns over 70% of En+ and is also the subject of a letter to the SFO from the Russian opposition leader Alexei Navalny, calling for an anti-corruption investigation into his affairs after he was filmed on a yacht with Sergei Prikhodko, Russia’s deputy PM. The yacht trip only added to the intrigue around Deripaska’s links to Manafort and the Trump campaign, especially with new allegations of more meetings on the US elections surfacing…

This is likely not M’lud Barker’s biggest headache. Both MI6 and officials in Washington are angry that the float went ahead, as most of the funds raised went straight to the state-owned Russian bank VTB, which is under both EU and US sanctions. Having secured a bridgehead on the LSE, En+ is rumoured to be gearing up to raise another $1 billion from investors. While happy for its oligarchs to raise money in London, Russia seems less pleased about the presence of ex-KGB officials in Salisbury. Barker, a close pal of ex-PM David Cameron, must be wondering how to salvage this one…

2017: The Year ‘Experts’ Were Completely Confounded

Among all the predictions of doom and recession the remainers and economists got wrong they were right about one in 2016 – the pound did fall 15% after the vote. This was not unexpected, Leave backing donors like hedge fund manager Crispin Odey figured that out and traded accordingly. The pound was widely seen as over-valued.

The pessimism on the pound continued into 2017, HSBC predicted it would hit parity with the €uro, Remain backing investment bank Morgan Stanley toppped that with a prediction that the € would surge past parity to be worth £1.02. Brexit-backing economist Roger Bootle’s firm Capital Economics stuck their neck out at the same time and said the £ would finish at €1.13. The pound ended the year at €1.12…

Goldman Sachs’ CEO Lloyd Blankfein has been outspoken against Brexit, his firm forecast sterling would fall from $1.25 to $1.14 in 2017. In fact, it has risen to $1.35. Goldmans also forecast  that the 10-year gilt yields that determine government borrowing costs would rise from 1.28% to 1.65%. They fell to 1.19%…

We were told that banks would leave the City last year, there has been no such exodus, London still has more international banks than any other financial centre in the world. We were told that foreign investors would shuna UK poised to Brexit, yet inward Foreign Direct Investment (FDI) hit a record high in 2017, dwarfing all other EU countries. The experts were absolutely wrong.

These same Remain supporting investment banks and international institutions are now predicting that Britain’s GDP will plummet outside the EU. Ironically official figures have just been revised up putting UK GDP growth up with Germany. UK and French GDP has been neck and neck for years, France is actually ahead currently. Guido will wager that in a decade the UK’s GDP will actually be greater than that of France. Any takers among economic experts? 

From Husky Hugging to Coal Mining

Greg Barker, now m’Lord Barker of Battle, Cameron’s husky hugging companion and former swivel-eyed Energy & Climate Change minister, has found a use for his experience gained in Government. Long a fan of Russian billionaires, Barker is the newly-appointed chairman of EN+, a Russian energy and aluminium conglomerate controlled by oligarch Oleg Deripaska. Barker’s first job is to bring a veneer of respectability to the energy company as it floats on the LSE. He’ll have his work cut out…

EN+’s owner is certainly close to the Kremlin: wikileaked US diplomatic cables described Deripaska as one of “the two or three oligarchs Putin turns to on a regular basis”, while the US still refuses to give him a visa due to his links to organised crimeDeripaska’s dealings with Manafort won’t help his cause…

More troubling are EN+’s ties to VTB Bank, the Russian lender that has been sanctioned by the US and EU since the Russian invasion of Ukraine and annexation of Crimea in 2014. As the Spectator pointed out:

EN+ says it intends to use the ‘primary proceeds’ of the share offering ‘to repay a portion of its debt’ – which is owed largely to Russian banks such as VTB (also an EN+ shareholder) that helped bail out Deripaska’s businesses with Kremlin support after the 2008 crash, and are currently subject to US and EU sanctions. So London investors’ money will be flowing back into Putin’s other-wise ostracised banking system. 

With sanctions still in place on VTB and Russia, Barker has to convince investors that this deal does not violate sanctions. He’ll have an even harder time explaining to Cameron why he’s working around sanctions his own government helped put in place…

Aside from all that, take a moment to reflect on the sheer cynicism of a husky hugging Climate Change hyping minister becoming Chairman of a coal-mining to aluminum smelting conglomerate. One Tory grandee told Guido that Barker “must be short of cash.” 

Goldman Sacks Pound Bear

Goldman’s top currency-market strategist Robin Brooks left the bank last month. Goldman Sachs was advising its clients that its “top trade” for 2017 was to short the British pound against the US dollar. It has now reversed its recommendation.

In a research note published yesterday the bank offered a mea culpa and recommended clients sell dollars to buy pounds. At one point earlier this year people were talking about the £ going to parity with the $, it is now at $1.28. Hard to know how the Remainers will spin this…

UK GDP Beats Predictions and Exports Up… Again!

UK GDP growth for the fourth quarter of 2016 has been revised higher this morning to +0.7%, higher than the expected +0.6%. The Office for National Statistics revealed export growth of 4.1%, which alongside a fall in imports of 0.4% means net trade added 1.3% to growth. Brexit Britain’s boom continues to defy the ‘experts’…

Brexit Inflation and Interest Rate Signals

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The Bank of England’s inflation target is 2.0% – with the fall in the pound inflation is set to overshoot to between 2.5% and 4.5% depending which rune reading economist you believe. When the 2% target is missed by 1% or more Carney has to write to the Chancellor explaining why he has missed his target.[…] Read the rest

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Investment Bank Moves Jobs to Britain

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The Dutch investment banking giant ING is moving as many as 60 trading jobs to London from both Amsterdam and Brussels. The €44 billion firm is cutting 11% of its global workforce and chose London, the financial capital of the world, as the destination for a chunk of its European workforce.[…] Read the rest

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City Boys Staying in London

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Mark Carney is up in front of the Treasury Select Committee this afternoon where he is going to have to explain why he cut rates and re-started QE prematurely to Jacob Rees Mogg, who thinks “He acted too early in my view. […] Read the rest

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PMI Data Shows UK Brexit Fear Has Receded

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Today we saw surprising PMI data released in the US and UK. The UK surprised on the upside with a 53.3 reading, the US surprised on the downside with a 49.4 reading. The €urozone average is 51.7. That puts post-Brexit Britain in gold medal place on the PMI podium…

It is important to understand that the PMI is a survey and reflects the attitude of purchasing managers to the economy and market conditions.[…] Read the rest

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London Lands 30 Billion Rupee “Masala Bond”

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India’s first offshore rupee-denominated bond was listed on the London Stock Exchange today. The investment – known as a “masala” bond – was issued by India’s largest bank HDFC, whose chairman Deepak Parekh praised London’s “wide range of financial instruments” and “unshakable trust from international investors.”

“While we did explore other markets for listing, the responsiveness and efficiency with which the officials at the UKLA and London Stock Exchange responded to our urgent requirements was remarkable.”

HDFC’s decision to place the 30 billion rupee / £341 million bond on the British market was preceded by the Chinese government earlier this year, who issued the first ever Yuan bond outside of China (worth £300 million) in May.[…] Read the rest

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Everybody’s Investing in Brexit Britain

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Three huge businesses have announced major UK investments in the space of 24 hours – in some cases contrary to what their officials claimed prior to the referendum vote. GlaxoSmithKline has announced £275 million of fresh investment, London’s City Airport is getting a £344 million expansion, and Deutsche Börse’s shareholders overwhelmingly approved its merger with the London Stock Exchange.[…] Read the rest

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“Government Sachs” Hires EU’s Barroso

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Goldman Sachs has continued hugging the EU commission tight, after financing the anti-Brexit Remain campaign and spending millions lobbying Brussels, the aggressive Wall Street firm remains careful to keep in with the Eurocrats. Known as “Government Sachs” by those who mock the firm’s habit of hiring and providing US government officials, it is clinging tight to the EU bureaucracy post-Brexit.[…] Read the rest

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