EU - Image Is Everything

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Includes: ACWI, DGT, FIGY, GLQ, HACW, IEIL, RGRO, RWV, VT, WBIL
by: Polemic Paine

The narrative on China strikes me as being much like that on Europe in 2012. The call for failure is constant and noisy, yet the outcome starts to erode the instant death narrative. Warnings from the OECD that China could cause the next economic crash, though quoted in an alarmist way, did qualify it with "if there is a hard landing." This second derivative assumption is all too pervasive in financial reasoning. Quote the high percentage relationship between first derivative and second, and it implies a high percentage probability outcome of the first derivative, which of course is nonsense, but a clever trick for marketing. A form of selective Bayesian implication.

But I digress. Asia is fine and, as mentioned yesterday, has pretty much ignored the spat of market worry in the west. Further following on from yesterday's comments, commodities have not only stopped falling, but also put in the bounces suggested. Oil had a lift from the API drawdown figures, which is the first sign of a real change in physical supply/demand rather than speculation over future OPEC agreement, and copper is doing its best to hold on at the support. US stocks held the 2030-35 area that is technically key and have bounced, emerging markets are doing well (as expected if the G20 plan is to stabilise the USD). FTSE has followed both commodities, EM and US bounces, and I am happily back long of risk assets, thinking that the iron pyrites "fools crash" of yesterday has played out the wall of worry factor returns and drives things higher again. Though I have gone tactically long on DAX, there is a real fly in the ointment of a generalised asset bounce. Europe.

Battleship Europe is having a bit of a timing problem with its banking engines, sending an unpleasant judder through the whole of the ship. The other slight concern onboard is that the cooling system on the Greek warheads is struggling to keep up with the radiation coming off them.

The seasonality of Greek debt negotiations is upon us, and though I am pretty sure that most of the last batch of bailout has been spent, the tone from the negotiations is one of quiet understatement. Not so much quiet understatement of the positives, but the negatives. Whilst the "we all are working towards a positive outcome" comments sound great, they really don't tell us much.

And here is the problem the EU has. Though the EU battleship plays hard ball with the UK EU referendum, firing warning shots across leavers bows as to what will happen if they don't follow instructions; the EU knows that the image of Europe in British eyes is key to the outcome. It has to have its ship spic and span and looking as lovely and powerful as possible. This involves sweeping the dust under the carpet and trying to spray as much air freshener as they can over the stinking heads (nautical term for lavatories).

Which makes for a very interesting timing issue. Can the Eurocrats keep the woes of European banks off the radar long enough to get through to July and will their methods of obfuscation also go unnoticed. If the ECB decides that it's going to buy banking stock as part of its QE program, with the secondary effect of rescuing the likes of Deutsche Bank (NYSE:DB), then I hope that someone points out to the UK public exactly how bent that is.

Meanwhile, the Greek negotiations must be a headache and a half. On one hand, the EU would love to replay the draconian threat policy that cowed Greece a year ago, but of course they can't be seen to be an authoritarian overlords at this critical time.

Image is everything, as the Child Catcher from Chitty Chitty Bang Bang knew.

If I were negotiating for Greece right now, I would be using the situation to demand as much as possible and digging my heels in. Europe cannot afford to have any imperfections showing as we come into the June referendum, let alone have their sewers explode publicly.

The mighty dreadnaught must not be shown up for the tramp steamer in camouflage it may really be.