We know the polls…

The unpredictable politics stays the wild card in the game. It will be suspenseful for example in the France. We know already that the fight for presidential office in France will be between F. Fillon for republicans and M. Le Pen for National Front. Even though the media labels both as right wing but from the middle-European view it is a little bit non-right right wing.

For example Fillon wants to slash the cumulate national spending by one hundred billion euros over five years, cancel the tax on the wealthy (which could be labelled as right wing) but at the same time he is considering to raise the retirement age only to 65 years which is falsely low (and that doesn’t sound too right wing in the middle-European understanding.) Le Pen wants to even lower the retirement age. Is this the right wing?

According to the polls, Fillon would win in the second round of presidential election so far against Le Pen 67:33. But we know the polls… If they work as they worked during the Brexit voting or the American elections it is going to be fun.

And then there is another giant problem with the Italy. The polls there are signalizing the Sunday’s loss of Prime Minister Renzi. That should hypothetically mean the end of the government. Pressures are growing last minute on him to not resign. Simply politics. No rules apply in it.

Either way, the referendum will be a giant insecurity for the euro. The difference between yields of Italian and German bonds is on the record level already today. I would rather bet on the weaker euro…

Europe has a new problem: Italy

There are times when the headlines of world papers are filling up with words like stocks. That happened for example at the beginning of the year 2016. There are times when it’s written a lot about gold. Or oil. Or about the financial markets generally – that happened for example during the time of Brexit voting. But there is one instrument, which usually doesn’t really attract the general laic public and so it is mentioned in the non-professional media only marginally. And we are currently at the time when the economic public practically talks about nothing else. Because that something is in movement. And if the macroeconomic connections are concerned and the potential consequences, it is perhaps even more significant than if for example the stocks were in comparable movement. That something is the government bonds.

 
Their movement was enhanced by the fact that the open scissors between the American and European monetary politics became more and more emphasized in past days. While it is expected that the monetary politics in the USA get stricter in the form of suspected raising of the signal interest rates in December, in Europe the monetary politics still stays very loose (even though it is assumed that sometimes during the spring the European central bank (ECB) also gets tougher).

The result of this disunity is mainly present in the still growing prices of primarily German government bonds. But when the price of the bond is growing it means that I buy it today for a lot of money and in time at the end of its maturity I get from the state that is the debtor, only relatively small nominal value paid back. So my so-called yield to maturity is very small or in the case of German government bonds even negative (I have a loss from this investment). And the new record happened on Wednesday: the loss from having 2-year German government bond reached the so far record of -0.75 %. That all can be happening only because the German bonds are considered the safest in Europe.

But that is not the end of it. The juicy part is only coming. While the German bonds are still more and more expensive the Italian bonds are on the other hand cheaper and cheaper (or their yield to maturity is on contrary growing). Speculators are starting to fear the Italy with how is the referendum about the fate of current Italian government coming up. And when the government falls, the election models suggest that the anti-European movement Five Star Movement would win in the early election. That would, of course, be a fundamental problem for Italian public finances because Italy is able to finance its debt only thanks to the support from ECB. So the Italian bonds are considered to be riskier and riskier.

The drop of the prices of Italian bonds wouldn’t be that interesting on its own if there wasn’t the essential start-up with its German counterparts. And not only that. So-called CLI for Italy (or composite leading indicator designed so it would predict the economic crisis the best it can) started dropping year on year already. While since the year 2000 similar drop announced four out of five Italian recessions. Both the yields of Italian bonds and this “leading indicator” are suggesting upcoming recession for Italy.

It could seem that the problems of one European country aren’t significant from the global point of view; but that would be wrong. Let’s remember how hysterically the financial markets reacted to problems of much smaller Greece. Italy is not a “single country” – it is a part of Eurozone. And Eurozone is one of the three most important economic areas: USA – China – Eurozone. Hypothetical gradation of Italian problems would therefore certainly transfer for example to the prices of Czech or Slovak bonds, which will then have an impact on shareholders of mutual funds or pension funds.

The difference between the behaviour of German and Italian bonds is so prominent that ECB announced that it is intending to let more German government bonds into circulation. ECB as a part of its money pumping into the circulation bought a significant amount of European government bonds (or it bought bonds from banks and literally “forced” cash to banks for it) and those are now missing in the circulation. To such a degree that the interbank market with short-term deposits is in fear of freezing, i.e. repo operations, where the government bonds are heavily used as a form of deposit. Freezing of market would be a significant problem because then we could basically talk about a financial crisis (which is about nothing other but about freezing of the interbank market).

That’s why ECB decided to borrow again part of demanded German bonds it owns so they could be used as deposits again. This news released a little bit of steam from the pressured European bond pressure cooker, so the prices of German bonds immediately slightly dropped, either way, their yields at many maturities are still staying deeply negative.

Let people choose

Various changes should happen in the financial world naturally. I don’t like one bit this artificial pressure from above that all the transactions in the future should be electronic from day to day. People have to find out on their own what works for them better.

 

Let’s learn from the Sweden. Swedish central bank is considering if it is going to issue a digital currency as a first prominent institution of its kind in the world. That way it wants to respond to the growing diversion from cash in this Scandinavian country.

 

The local central bank had shown in past that it is progressive – as the first one in the world, it has started printing paper currency hundreds of years ago. And to the future, it will have to react to the fading interest in cash transactions. The number of banknotes and coins in the circulation has dropped 40 % in Sweden since the year 2009. Not even the issuing of a digital currency would bury Swedish banknotes and coins right away. Both of these means of payment would work at the same time for a certain amount of time.

 

Let people choose what way of payment would be more comfortable. This unforced manner is closer to us than that the Czech business sector will have to obligatory register its revenues online (EET)…

Who is expecting Italy to leave EU? And that is real.

When I read through current media, I have a feeling that they got stuck in a circle. They keep asking how it is possible that Trump won. Important things then fall behind. Trump’s victory has only shown that the pendulum of history diverted and people want completely radical change. And the question what kind of change it will be is now more important than the past. And the immediate change will probably come up in Italy:

Without the media commenting this more, the election of new Austrian president will take place on 4th December and at the same time, the referendum regarding the constitution will be held in Italy. Both can significantly change Europe.

In Italy, it is not that much about what is being voted but it is more about the fact that the government connected its future with the referendum. That’s why it seems that the people will be voting “No” to the new constitution. That way they will, of course, bring down the government. The rebellion in form of Brexit and later Trump has inspired many to vote also “rebelliously”.

When I was claiming after Trump got elected that we just drove off the hill it was meant in a complex way – it is not only about Trump, but it is about the fact that he was the start of the series of events which will have a significant influence on the economies. Who had expected BREXIT or Trump? Few people. Who is expecting Italy to leave EU? Almost nobody. And that is real.

Early national elections will most likely take place in summer 2017 in Italy. And if they do take place then the party which is clearly saying that it wants a referendum about ITEXT will most likely win. While the Brexit was basically about nothing because Britain had many exceptions and their pound, this voting would be about torpedoing not only EU but mostly the Eurozone.

The passions are hardly cooling down

One would want to say: “Enough of Trump, a little bit of pure refreshing economy would do us no harm now.” Except it won’t be given to us for a while because no matter what gets mentioned on the financial market today, everybody is excusing it with Trump like he perhaps has a hand in it even if it was let’s say about publishing the statistics for the year 2015. This entire hysteria is simply starting to get somewhat overlarge proportions and Trump is being credited with almost supernatural powers of influencing the economy.

This extreme, in which Trump is being given the attention to, is very well visible in this little triviality: One of Trump’s economic advisors (who we by the way don’t know much about so far), David Malpass, said today in an interview for CNBC, that he assumed that Trump should focus in economic field on topics like economic growth or support of small businesses via lowering and simplifying the taxes. (Like we haven’t heard these slogans sometimes somewhere before. It is the classic return of election slogans of all classic right-wing parties all over the planet.) And that Trump should supposedly talk less about big macroeconomic topics like the monetary politics of the American central bank the Fed, which is apparently independent after all. (Where did the pre-election radicalism suddenly vanish…?)

Well yeah, but with that it’s like the big global topics, which the financial world feared so much until the last minute were suddenly vanishing and topics that are interesting perhaps only on the American playground were appearing instead of them. Obviously, it is not certain that words of one advisor truly represent the official course but if it was true then it would indeed mean radical turn from everything expected. It would also mean that the financial market had no reason to worry…

Paradoxically, there is one good news resulting from this for us: Trump as a phenomenon toying with the markets could be forgotten pretty soon (because what to do with the factor that nobody knows what can be expected from it?). And the financial side of economies could return to more rational thinking pretty soon. Does it change anything on our conclusions from last days that the dollar and stocks globally are currently vulnerable? Nothing changes. Only that one wild card will be eliminated soon. Others and well dealt out cards are staying in the game.

So you chose Trump? The wild ride begins.

So now we know the score. And what are the facts?

Firstly, I don’t consider Trump’s victory to be very surprising. The pre-election polls were very similar to the polls released just before the Brexit voting: Both parties were getting closer, even the more “rebellious one” got to lead for a while and at the end, both of their preferences dropped. It could be a warning for everybody that the seeming outsider and bigger rebel has more chances than it seems. In summer it was Brexit and now it’s Trump.

Trump used to be often compared to Raegan. Which after all, wouldn’t be such a bad choice because Raegan really soundly kick-started the American economy in his times. Except that it is very significant misunderstanding and the financial world knows it. Trump is not Raegan. Trump is actually very badly readable when it comes to the economy. In reality, nobody knows what to expect from him on the economic field. If the America was more or less divided in half until the last minute, the financial world saw it black and white: Trump was considered to be a disaster. And they have specific reasons for that.

His “program” is more like a collection of individual slogans which are not connected by a unified economic philosophy. For example, we know that he would like the liberalization of domestic American conditions (in form of dramatic reducing of taxes) but at the same time, he is talking about protection of foreign trade (in form of duties and quotas), which would probably start in case of its implementation a business war. And that logically doesn’t really go together.

The most visible movement can be seen on stocks in the future. And the fact that stock are growing NOW says nothing about the future – it only show that the market doesn’t know how to read the situation. In past, I wrote here that there are more and more dark clouds appearing above the stock markets. From the slowing China, through the uncertainty how will the signal interest rates in the USA develop, to for example the possible victory of Trump. We can not consider Trump to be the reason for the market’s drop; but we can understand him as an impulse, detonator, last drop which will make the glass of stock markets overflow. The possibility that the clearance sale which was happening on the stock markets in past few days could be of long-term nature is growing a little bit.

However, this all will be true in the case that Trump starts fulfilling what he has promised. Once again, we need to understand his un-readability. All these trends mentioned can fall apart like a house made of cards in case that the upcoming Trump’s words suggest that he won’t be that eager to fulfil his pre-election slogans.

Will the stocks get back on track OR has something bigger started?

Minus 1.34 %. Minus 1.36 %. Minus 0.76 %. Minus… and the same thing based on the same stencil. You want a tip what is it?
It is the table of the development of world’s stock indexes read one after another. The Japanese Nikkei 225, British FTSE 100, Pan-European STOXX Europe 50 and so on and on. Only the America is in the moment I’m writing this article missing from this text because of the time zones. When I was writing here on 13th October a warning about the stock markets and claiming that my nose is intuitively smelling something bad I honestly hoped that I get to publish this warning before the first sparks fly. (Simple intuition is sometimes more than entire analytical apparatus of let’s say central bank.)

It could seem that the spark has already flown. But – frankly, let’s be careful about judging it like that. So far it can still be “only” short foreplay even though it is going on for two weeks and so far the global stocks are lower “only” about 5 % in average. Either way in the spirit of my last warning I am slightly tilting towards the probability of the other option: which is that this dropping trend will last long.

Firstly: One look at the thrilling graph of various polls of public opinion (according to BBC) is suspiciously reminding me same thrilling graph released just before the Brexit vote. At that time the chances of for and against opinions touched and suggested that the trend might shift. Just like in the case of Trump and Clinton when the preferences of both candidates met at 45 %. And we all know how it ended up in the case of Brexit. Is it perhaps the same situation repeating itself? There are a few things in the trends of public polls suggesting that; even the fact that the opinion which is generally considered to be the more “rebellious” one (meaning for Trump) which is therefore underrated in surveys is catching up just like in the case of Brexit. We also know very well that the financial markets fear Trump. If Trump wins, which seemed to be highly unlikely according to the polls until now, then it’s going to be a clear knockout for the stock markets. And long lasting fall will be guaranteed.

But with the probability just as high (actually according my private guess with probability even slightly lower) we can expect Clinton to win. But even then the stocks won’t be safe. We have the end of the year coming up with possible rising of the American interest rates and spring ending of the bonds buyout programme in Europe is almost here as well… And remember how poorly the stock markets started this year? And remember also that the reason for their poor start was just one raising of the interest rates by the American central bank last December, which could be repeated now?

Here’s the thing: Stock markets are overdone, I don’t doubt about it so the question isn’t if this bubble will burst but WHEN will it burst. To be more specific: The question is if this bubble has already burst or if the stocks manage to put it together again for a while.

At least three more warning signs showed up in last three or four weeks, suggesting that the burst of the price bubble could be on the horizon. Firstly, the chances of Trump’s victory dramatically grew. Secondly, the condition of the European banking industry got revealed bit more. And I don’t mean only Deutsche Bank or Italian Monte Paschi that is only the tip of an iceberg. Thirdly – which might be the most important even though it’s the most difficult to notice on the first sight – many stock indexes dropped under something which we call “support” in last 48 hours.

This support is the index level which many speculators assume to be for some reason a key level according to so-called technical analysis. To prevent excessive losses they set in their business a system, so-called automatic instruction to trade. Those basically without the interference of human factor start selling the stocks when the support level is reached – but that way they are pushing the prices even lower. And the spiral is automatically getting into motion. We can clearly see for example the indexes S&P 500 or DJIA reaching this support level.
Let’s summarize it. Especially in the case of Clinton’s winning the stocks might shake it off and their drop doesn’t have to be a prophecy of any bigger drama. But at the same time, the chances that the opposite will happen are growing. Wednesday after the elections will solve this puzzle to certain extent.

Was the entire Brexit voting completely useless?!

Sometimes I feel like we live in some never-never land. I remember how they say elections will be held then it didn’t happen and the elections got postponed. Other times the government didn’t get the vote of confidence from parliament but it continued to rule thanks to the president. Other times we say that we look like idiots in front of the entire world because of “this and that”. But in reality there is something like that everywhere: Everybody got blown away by news that the British High Court has ruled that the parliament must vote on whether the UK can start the process of leaving the EU according to the Article 50 of the Lisbon Treaty! Does it mean that the entire Brexit voting was completely useless?

It is unbelievable. The court is basically saying that the parliament (elected by people) is superior to the will of people that was expressed in a democratic referendum. Theoretically, the parliament could reject the result of the referendum and cancel the BREXIT. It is publically known that a majority of the members of parliament voted to remain in EU. It has been parroted many times that the Britain is the oldest democracy but what is actually democratic about this decision? It is only showing that Britain keeps thinking like it’s in medieval: us versus them.

Problem is that all of this has completely fundamental economic consequences. The moment parliament got into the game it was obvious that what voters decided to be “hard BREXIT” will be at best “soft BREXIT” or even no exit. The fear from BREXIT immediately died down a bit. The pound appreciated right away. That’s why I’m going back to something which I have been saying for a couple of months: the pound will appreciate next year. Now you still have an amazing chance to go on a cheap shopping trip to Britain. Earlier I would say that even British real estate is cheap enough - but now, those are in my opinion overdone and I wouldn’t recommend to buy them. At least I have a good excuse for my spouse why I won’t buy her that castle by Scottish loch ;)


Marketa Sichtarova & Vladimir Pikora

And what if it's Trump?!

The financial markets are obsessively living for the upcoming American presidential elections now more than Kim Kardashian lives for her excessive body. Financial markets got slandered by new surveys that are saying that D. Trump is lowering H. Clinton’s lead and according to some he even got to slight lead.

That is a hard hit for those speculators who were betting on the stability which would the Clinton bring. Trump would bring changes which is the only thing that’s certain. It is not certain what kind of changes they would be. (We can only likely assume that his victory would bring more “fun” to the financial market than the victory of his opponent in every sense of the word.) That’s why everybody involved started reinsuring operations.

They are preventively preparing for Donald’s victory. There are more and more guesses about how much would the victory of D. Trump shoot the stocks down. The guesses are differing at American index S&P from 4 to 11 %. That is a lot. But I must say that this guess is concerning only the initial reaction. It doesn’t count with something more dangerous, something I have been constantly pointing out in past months: If the markets crashed then under a certain circumstances it could start a wave of automatic trades, which would cause a more dangerous long-term negative trend.

The only thing we can say about the presidential elections now is that it will be close and suspenseful. If Trump wins than this trend is going to go on for at least couple of years. And then we will see; all options are open – it is going to depend on his first statements. What is interesting about Trump is that he still doesn’t know what he wants. There is also one possible option that after the elections we will find out that the pre-election speeches are just speeches - and he’s going to rule like everybody before him. Just like the exactly opposite option that he will turn the American politics about 180 degrees. To bet on Clinton is more transparent from this point of view because everything would just get back where it used to be.

End of high prices of fuel?

After the escapade with the investigation of H. Clinton’s email communication, D. Trump who was almost written off got back into the game. And it puts new cards on the table.

 

Why? The result of the American presidential elections can influence even such a thing like the price of oil long-term as well!

How is it possible? Clinton who is the favored candidate so far announced in past that she will try to significantly lower the usage of energies (by one-third) and will fight against the climatic changes. Moreover, she would also make the conditions for producing the oil from alternative sources harder, which was why the USA got into the oil production highlight in past years. It is well known that to produce oil out of shale which is very deep in soil by using huge pressure of water is not a good marketing for the ecology. I would bet that the oil sheiks from the Middle East will excitedly chant for Clinton. It is her victory that could be the slap to American oil producers that could limit the oil production in the USA.

Nowadays, the USA produces 8.5 million barrels of oil a day (mbd.) According to the extreme estimations the difference between H. Clinton and D. Trump could reach in case of the American oil production 1 mbd. in favor of Trump.

But that changes nothing about the long-term conclusions. The production of oil will be growing because of the new production options. On the other hand, thanks to the boom of engines working on alternative fuels I doubt that oil will be that desirable in the future…

The elections are stirring up the situation already

The American presidential elections are on the one hand, still far away but on the other, whoever is justifying whatever by the upcoming elections. For example, something so geographically distanced from the America like European stocks is making excuses by blaming the American political situation for its condition.

Are you saying it makes no sense? But it does! I repeatedly mentioned here that the financial markets would rather see Hillary Clinton as the winner of the elections than Donald Trump who they consider to be less predictable. Financiers are especially scared of Trump’s love in various quotas, duties, and other limitations of the free market. The latest news about the new investigation of potentially sensitive emails sent from Clinton’s private email account are lowering her chances of winning in the eyes of the financial world a little bit – so in the spirit of this logic the European stocks are dropping. Because who would suffer more from the duties imposed by Americans: American or European companies? Obviously the European ones. That’s also why the stocks of the European companies are suffering more when they think about Trump’s possible victory.

I am still being very careful. Statistically, according to the survey of the public opinion there are bigger chances that Clinton will win and in that case, the financial markets would probably not even react or they would react very slightly with relief – which would manifest in slight appreciation of the dollar and stocks. Basically no real movement. If the other variant happened – and we who are still remembering the surveys of public opinion about Brexit are still considering this option too – the reaction would be very similar to the one which came after the British referendum. It would be a pretty sharp reaction and from the point of view of the dollar, stocks, and bonds a negative one.

But to be fair it is not only the politics which is making the situation worse here. There are many other tangible things in the picture which are causing this tension. For example, the weakest revenues of German retail sector in two years which are sharply in contrast with other indicators of the same economy. While according to various indicators hinting the confidence of businesses and households in Germany it is not as bad in Europe, on the contrary, considering the weak revenues it seems like the crisis is already beginning. Such ambiguity is not helping the financial markets to feel safer.

So it seems that we have at least a couple of restless days ahead of us. I have already warned here that some of the stock indexes are getting dangerously close to their so-called “support levels” – which are levels that will launch automatic trade orders that will more or less without the human interfering start selling stocks in an attempt to stop even bigger loss from happening if they are reached. Except when the automatic sales will be launched the prices will start spontaneously dropping even more. For example, the index S&P 500 is getting close to that level. It is only 10 points away from the potentially dangerous level of 2120 points. If it god forbid happened at the same time as Trump’s victory then the stock markets would experience something which I can call sort of unprofessionally only as “pretty messy”.