A View from the Trenches, June 14th, 2010: "It's calm out there"
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There isn’t really anything new to support a different direction for the markets, since our last letter. We have seen the Euro stable around 1.20-1.21 USDs, with gold holding ground at the 1,220-1,230 $/oz and the S&P500 seeking to firm at 1,080pts. We wonder what could be justifying this situation, given the continuous lack of clarity on the European Central Bank’s intentions or the institutional weakness in the European Financial Stability Fund (EFSF), which we discussed last week.
On Friday, we read that stock prices were reacting to positive news from Asia, overcoming the fears coming from Europe. We always have difficulty believing in these “animal spirit” explanations and are instead inclined to think that the resistance in all markets could have possibly been triggered by the intervention of the Swiss National Bank (SNB) in the foreign exchange and sovereign debt markets. The Swiss Franc, together with gold, has been a credible alternative for those fleeing the Euro-zone, but who still want to leave their capital in the Continent. This has provided a strength to the currency that for some (ridiculous mercantilist) reason concerns the SNB.
In any case, we always pay attention to movements like those on Friday, when both stocks and Treasuries rally simultaneously…with the Euro! We attach the corresponding chart below (source: Bloomberg, orange line: S&P 500, white line: 30-yr Treasury):
Lastly, we think investors ought to pay careful attention to political developments. In our view, there is a slow but steady movement to the right. It is a weak shift so far, a headless shift, but a shift nonetheless. We think that if the move continues to the end of the year, with the elections in the US, the perception on sovereign risk may change radically, strengthening the USD. But this is only a fragile speculation of ours, so far.
The Tea Party fraction in the US has been winning ground inside the Republican Party, as the primaries in Kentucky, Connecticut, Nevada and California are showing. In Canada, last week we had former Minister of Foreign Affairs and currently MP for Beauce, Québec, M. Maxime Bernier, present at the Economic Club of Canada. M. Bernier, a member of the Conservative Party, openly suggested the return to the gold standard. We were really, really caught off guard on that one. We were not alone, as the media extensively discussed these declarations. Given that M. Bernier was surely trying to attract attention, like every other politician does, we are the more surprised to see that he chose such a radical stance in monetary matters in a country whose financial system, except for the Asset-Backed Commercial Paper embarrassment, has not suffered.
As well, in Belgium, a country who saw a sharp rise in the risk of its sovereign debt, the Flemish separatist N-VA party emerged successful in this weekend’s elections. The nationalist parties are expected to win 30 of 150 seats in Belgium’s lower house. We think these are all signals of the times to come. These times will be more about debate and discomfort, rather than coordination…and we ain’t seen anythin’ yet on the Asian front!
Martin Sibileau
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