Blain's Morning Porridge, submitted by Bill Blain

“Let no tongue on earth be silent, every voice in concert ring, evermore and evermore! ”

From now till Christmas, the morning quote will be from Christmas songs. Give yourself 10-points for each one you recognise, and an extra 10 if you sing it out loud in the office…

Over the weekend I was told recent Porridge’s have been far too Doom and Gloom flavoured. It’s been suggested I should relax about the perilous state of the global economies and stop worrying so much about fractured politics… Even take my own advice about things never being as bad as they look - breathe deep and move on. Although the stories dominating the headlines look profoundly negative – “their collective effect will be little more than light ripples across the teacup of global activity.” (Not sure I believe that… this feels serious…)

However, the Morning Porridge is not about not worrying or trying to scare readers! It’s about spotting the events likely to discombobulate markets, and how these might be approached as opportunity. Events trigger volatility - and volatile markets present opportunities. On the other hand, I’ve never experienced a December like this – normally markets relax, business activity tumbles, and everyone parties. This time it feels very different. Markets aren’t supposed to stay serious through December! It bodes ill for January.

Sadly, the stories likely to dominate the markets this week do not make me think “its beginning to feel a lot like Christmas”.

There is a definite lack of resilience to current markets. It does not feel like we are on solid foundations – perhaps it’s because its only 2 more Brexit secretaries till Christmas, or maybe it’s because we’re all hoping next year will get better? (Hope is never a strategy!) The facts are we are not in normal markets. After the correction we’ve seen in stocks through October till now, the patterns don’t fit any conventional chart formations. Buy-the-dip rallies have lacked momentum.

What’s changed? It feels there is nothing for investors to hold as “causal”- the smoking gun that triggered the current instability. Instead there are multiple points of fracture: at the strategic level, strategists can point to corporate bond credits and spreads, Tech war, Trade War, overvaluations in the face of the great QE unravel, the travails of Trump (who lost Kelly over the weekend.. how careless), personal and sovereign debt levels and a host of other indicators.

The political news is abysmal. From Brexit to Trump, from Italy to France.. you really cant make it up. Front line news - stories about individual companies in trouble, management failure, personal finance horror-stories, etc, all contribute to the growing sense of negativity.

Meanwhile, market feels less efficient. Institutional buyers are fearful about the unknown risks and consequences of Algo trading, or the amount invested in tracker funds which doesn’t apparently care which direction it heads, the fact their salesman at the favourite bank just got laid off, or just how illiquid their liquid portfolios are proving to be. There is nothing more dangerous to the market’s mood than an imaginative investor looking for reasons to be not cheerful.

This week, market sentiment will be dominated by the Huawei case in Canada. Trade war or Tech War…? The fact US jobs number was weaker than expected on Friday backs up the recent Fed mumble-swerve about not hiking rates too aggressively – although, at this point, we still expect a 25 hike on Wednesday. A number of commentators note the S&P just did a “death cross” – where the 50 day moving average falls below the trend 200 day MA. Apparently it’s not as significant as its name suggests, but it’s probably just enough to scare markets that little bit more and make this week another bumpy sleigh ride!

Brexit will dominate the UK markets. The problem with toddlers is they don’t know what they want. You’d have to wonder why anyone would want May’s job? Instability will dominate till a Brexit agreement is made. Sadly, peace looks a long way down the road. The UK parliament - for oh so many unnecessary reasons - will not agree this one, and will look to Europe to propose something better. Europe doesn’t want a trade shock from closed UK borders, but isn’t likely to give anything up. And the Yooropeens just played the European Court of Justice saying the UK can revoke Article 50 and become good Europeans again…

(Digression: Brexit is turning into a classic divorce horror story. Many years ago, I remember sitting down with the first Mrs Blain and together having a very rational and calm discussion about a very simple deal to split our assets to give her money and house. She agreed it was fair and went to instruct her lawyers. The lawyers disagreed. Yet, about 2 years later it was essentially the deal she got - but only after having to sell the house to pay away vast sum to lawyers that got her to where she started from.)

France - how quickly will the yellow vest protests die away? What can a chastened Macron say or do to defuse them? What are the risks of a Populist French backlash, or a right-wing sweep at the European elections in May. I’m told a Le Pen is now looking increasingly likely – the question is… which one?

What else to worry about? I guess we will know soon enough…