Germany “most at risk” from capitulation to ECB money printing says Kames’ David Roberts

The activities of central banks in the US and UK seem to be underpinning sovereign bond strength, which leaves Germany looking increasingly at risk, suggests David Roberts, joint head of fixed
income at Kames Capital in a new note.

Germany

Perhaps most at risk is the German market. Should Italian markets collapse to such an extent that Germany agrees to the ECB buying primary supply, the implicit cost to the German economy could push borrowing rates up materially.

There is no doubt Europe is a mess; there is no doubt growth will be nigh on impossible. The only roadblock to high eurozone inflation is German reluctance to have the ECB turn on the printing presses. Whilst we only need to look to the 1930s for reasons Merkel may be reluctant, if the alternative is a break-up of the EU then she may yet be persuaded. Under those circumstances, sell all the government debt, core and peripheral you can.

Emerging Markets

The lack of response from emerging markets to G7 economic and political turmoil has been astounding. To believe that internal markets are well enough developed to allow smooth, steady, high single digit growth is in my mind deeply flawed. Current account surpluses are all very well, but they need funded from somewhere – no growth in the West, a devaluing euro and trade flows will disappear quickly. Capital flows for now continue I see it as a value playto be positive and to dominate any rationality. We do not own the asset class. We retain short exposure through CDX indices and are comfortable to maintain this for now as a ‘tail risk’ hedge. That said, I see it as more than that but recognise the market will only truly sell emerging markets when in recession, as was the pattern four years ago.

Inflation

In the UK we have had a couple of years where CPI has been above target, to put it mildly. Headline US CPI hit 3.9% in September and in Germany the October print was 2.5%. I am sure the central bank community will tell you two things: firstly, that these numbers will trend down, second, these numbers are skewed by ‘exogenous events’ i.e. China is still buying coal and oil. I am sure they will tell you this because: one, I have heard it all from Meryvn, two, there are three ways to reduce a debt burden – growth (unlikely), haircuts (for US and Germany unthinkable) and inflation.

 

David Roberts is joint head of fixed income at Kames Capital

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