Survival of the fittest?


We recently read that a rare first edition of Charles Darwin’s Insectivorous Plants book was returned to the Camden Library in Sydney, Australia, after 122 years! The late fees were thought to be in the region of £22,800, but the book was astutely returned during the library’s ‘fine amnesty month’, although one senses that the library was just over the moon to get the first edition back.

Which got us thinking about Darwin and his ‘Theory of Evolution and Natural Selection’. The survival of the fittest in the animal kingdom reminded us a little bit of global equity markets, particularly when you consider the precarious financial state of Greece. Germany and specifically its manufacturing sector has been the long-term economic winner within the EU. In a financial sense, is it time to reconsider Britain as no longer being ‘Great’? Germany would appear to be the leader of the pride, or king of the jungle. It would appear, that Greece is an injured wildebeest limping along at the back of the Eurozone herd? If you’ve ever watched a David Attenborough wildlife documentary, you may already have a pretty good idea of what is likely to happen to the wildebeest?

What have we been watching?

Aside from the election debates, Friday’s alarming failure of Bloomberg’s global financial trading and data network. The global outage lasted more the 2 hours and affected 325,000 traders around the World. Whilst the impact of the failure is difficult to estimate however, on an otherwise gloomy day, stock markets had one of their worst days in 2015. It also prompted the UK Treasury to delay a £3bn Gilt auction. Questions have been raised, and again it exposes our vulnerabilities in a “too big to fail” technology age.

All eyes on Greece as the clock ticks down to the key Euro group meeting on the 24th April. Concern about the increasing prospect of a Greek default has sent Germany’s benchmark 10-year bond yield down to a record low of under 0.1%. Otherwise, it all seems to be about ‘lower for longer’ on interest rates in the USA and ‘bad news is good news’, with the potential for more stimulus in China following poor exports which in turn boosted mining companies and in turn lifted the FTSE 100 to a new high.

Talking of survival of the fittest, the New York Fed, the US central bank’s main markets facing operation completed its assessment of last October’s ‘flash crash’ in the US Treasury market describing it as one in a 1.6 billion year event! However, while the exact cause of the sell-off remains unknown, the Fed warned that the rise of computer driven algorithmic trading used by high frequency trading firms could mean that sharp intra-day price movements become more common. The head of the FCA estimates that 30% of business on the UK equity market is high frequency trading driven. In the USA the figure is believed to be much higher.

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In the UK, March BRC retail sales grew by an impressive 3.2% with home sales particularly strong on the back of an active housing market. The headline annual inflation rate in March remained at ZERO making an interest rate hike this year increasingly unlikely, with some forecasters suggesting no increase before the end of Q1 2016. Markets seem to be accepting the thoughts of Nick Clegg “no party will win an outright election victory and warned voters that they face a choice between the Lib Dems, the SNP and UKIP over who holds the balance of power”. A level of uncertainty post May 7th could also be extended. In the event of a Conservative win, a referendum will take place on the ‘Brexit’ issue. Opinions seems pretty divide on the issue, in the most recent poll – 39% of those polled in favour of leaving the EU and 40% wanting to stay in.

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In Europe, Greece raised the stakes saying that it was going to withhold €2.5bn of payments due to the IMF in May and June if no bail out funding is agreed by the end of April. This could be a negotiating tactic but underlines just how desperate a state Greek finances are in. The German finance minister said ‘nobody expects that there will be a solution’ and ‘nobody has any idea how we can agree on an even more ambitious programme. You can’t spend hundreds of billions in a bottle without a bottom’. Without a deal at the meeting of Eurozone financial ministers on May 11th Greece will likely default on a €747m payment to the IMF due on the 12th. The head of the IMF has already insisted that there will be no extension to the deadlines for loan repayments to the IMF.

Standard & Poor’s downgraded Greek debt to junk status. The ECB confirmed its exposure to Greece is a mere €110bn!

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Elsewhere in Europe, economic news was more encouraging as Eurozone industrial production grew in February, ahead of expectation while the ECB lending survey for Q1 pointed to a further easing of credit conditions. Although corporate demand for loans didn’t pick up in Q1, the expected demand for business loans for Q2 reached the highest level since the survey began in 2003.

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In the USA, the trend of softer than expected economic data continued with retail sales for March showing growth of 0.9% on the previous month. Industrial production contracted slightly again in March with oil and gas drilling activity down by 17%. This added to the view that the US Fed will want to see further evidence of a strengthening economy before committing to hiking interest rates.

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In China, monthly trade data showed an unexpected 15% drop in exports during March although this may be partly due to currency appreciation and some distortion from the Lunar New Year period. Chinese GDP growth slowed to 7% in Q1 in line with the official target, nonetheless, the poor export data has raised hopes of more stimulus.

Oil Drum
Oil ticked higher after an adviser to the Saudi Oil Minister said that the current low oil price was a ‘temporary, unnatural situation’ and that in the longer run that oil demand should grow annually by at least one million barrels a day. The Brent price spiked a further 6% in a day following a report from the US Energy Information Administration which suggested that May could see a slight dip in US shale oil production.

Finally, talking of Great Britain, it will probably not have escaped your attention ‘Britain’s Got Talent’ has returned to our TV screens. Despite being likely to get lots of crosses, there is a rumour that SNP Leader, Nicola Sturgeon, is a favourite to appear in the live final, with her magic trick, in which she will endeavour to saw Britain in half!

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