Macro Commentary
Global equity markets bounced higher this week (+2.5%) after last week’s sell off (-3.7%).
Whether or not because of recent market action, this week shaped up to be especially interesting from a macro perspective. As oil prices continued to slip, a desperate Russia with failing solutions to stem the ruble’s slide came out with a surprise interest rate increase from 10.5% to 17%. Talk abounded of the potential for capital controls but word out of the Kremlin is that they are not under consideration – if that can be trusted. Historically speaking, such a large increase in interest rates as an attempt to influence currency markets has a messy ending. Economies tend not to be able to withstand such high cost of capital for very long – especially when they are already weak. Putin put on his jingoistic persona in a three hour broadcast to the Russian people showing stoicism and defiance of what is painted as an attack from the West after events in the Ukraine. Geopolitical tension arising from low oil prices is to be expected, but the bears of Russia continue to isolate themselves further in a way that feels more risky than the potential issues in Iran or Venezuela.
Perhaps seeking to capitalize politically, President Obama announced that diplomatic relations with Cuba would be re-established and start the process of opening up the small island economy. Cuba has been receiving support from Venezuela but given the failing financials of that country it seemed a smart move on the behalf of Raul Castro to exchange a few prisoners and swap sides to the US. Perhaps the group seeking the most gain by this action is the Democratic Party in the United States. After an announcement earlier this week that the Hispanic-friendly Jeb Bush (the son of President George H.W and the brother of President George W.) is exploring the possibility of a 2016 run, the Democrats needed to do something to warm up votes.
Further on the election side, the vote in Greece failed to reach the threshold necessary to declare strong leadership again. Confidence in strong leadership is being lost as seen in their equity and debt markets. What is interesting is that the rest of Europe is not being “infected” by fear in this most recent occurrence. Perhaps, confidence is maintained that the potential for contagion is modest because action would be taken. Of course, we are still waiting for the ECB to take action on broader QE to enable recovery. Waiting is also what the US Federal Reserve is doing. They pulled a Porky Pig in their statement this week using the word “patience” in place of “considerable time”(Porky Pig a popular US cartoon whose characteristic stutter leads him to restate the same phrase a different way). Meanwhile the Swiss decided the flood of capital towards francs was too much to stand around. Taking an experimental step, they are reducing the interest rate on “sight accounts” (essentially demand checking accounts) greater than 10mm CHF to a NEGATIVE 0.25% causing those account holders to pay for the pleasure of their deposit. Whether or not it dissuades capital is yet to be seen.
Going into the end of the year, volumes are light and fundamentals are going to matter less. Instead, it will be about who shows up to transact in the closing weeks of 2014.
THE OPINIONS EXPRESSED HEREIN ARE THOSE OF EDGE CAPITAL PARTNERS (“EDGE”) AND THE REPORT IS NOT MEANT AS LEGAL, TAX OR FINANCIAL ADVICE. THE PROJECTIONS OR OTHER INFORMATION GENERATED BY THIS REPORT REGARDING THE LIKELIHOOD OF VARIOUS INVESTMENT OUTCOMES ARE HYPOTHETICAL IN NATURE, DO NOT REFLECT ACTUAL INVESTMENT RESULTS AND ARE NOT GUARANTEES OF FUTURE RESULTS. YOU SHOULD CONSULT YOUR OWN PROFESSIONAL ADVISORS AS TO THE LEGAL, TAX, OR OTHER MATTERS RELEVANT TO THE SUITABILITY OF POTENTIAL INVESTMENTS. THE EXTERNAL DATA PRESENTED IN THIS REPORT HAVE BEEN OBTAINED FROM INDEPENDENT SOURCES (AS NOTED) AND ARE BELIEVED TO BE ACCURATE, BUT NO INDEPENDENT VERIFICATION HAS BEEN MADE AND ACCURACY IS NOT GUARANTEED.