On September 12, I wrote: “Therefore, my second trade of the year [And by the way, I issued my third trade of the year the day after Donald Trump won the US presidential election – which is to buy the dollar] is to ‘buy put options on 10-year bonds because this is going to pop. When it pops, the wizardry won’t work anymore, and at that moment there is going to be one heck of a move’”.
Since Trump won, we have witnessed some seriously violent moves in the bond markets. The US 10-year bond has surged 55 basis points higher in two weeks, which is the biggest fortnightly rise in 15 years, and second biggest in almost 30 years. Of course, the US remains the baseline, and this has created a shockwave across global bond markets. Higher US interest rates have propelled the dollar higher and versus the Yen, the dollar is +7.5 per cent over the last two weeks – its best fortnightly performance since 1988, second best since end of Bretton Woods. This is big.
What we are watching is the cratering of the quantitative easing consensus.
Prime Minister Theresa May said this at the Conservative Party’s annual conference in October: “While monetary policy – with super-low interest rates and quantitative easing – provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects.
“People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer.
A change has got to come. And we are going to deliver it. Because that’s what a conservative government can do.”
British Prime Minister May and President-elect Trump have been propelled to power on the back of older (mostly white) folks, many of whom have seen their hard-earned savings over a lifetime, now earn them a paltry return and a negative one in many cases. When all the now dumbfounded pollsters reach their ‘’mea culpa’’ moment, they will all realise that they underestimated the frustration and anger of this constituency.
This is important, and this is what the bond market has seen very clearly. The QE consensus is dead in the water. Stone-cold dead. It is this realisation that is now creating a negative feedback loop across emerging market assets and bond prices. Trumponomics is going to accelerate this trend. Trump is proposing to cut taxes and increase spending. The dollar is at a 13-year high, Asian currencies are at multi-year lows and bond yields have soared. For those who have watched the flight to quality unfold here at home, this is no different. Trump is accelerating a global flight to quality and a stampede back into US assets.
Here in Africa, Egypt has capitulated. They have taken $12.5 billion from Madam Lagarde and freed the currency. The USD/EGP, which had been pegged at 8.88, climbed as high as 18.00 before settling down to 16.2495 last. Nigeria, which is in the exact same boat as Egypt has chosen a different path.
Authorities should be able to jail for as long as two years anybody holding dollars in cash for more than 30 days, or fine them 20 per cent of the amount, according to a draft amendment to Nigeria’s foreign exchange Act. Last week, security agents threatened to arrest black market money traders if they exchanged the naira at a rate weaker than 400 per dollar, compared with the existing street-rate of around 460. The currency’s official exchange rate, which analysts say the Central Bank is still manipulating, is 315 against the greenback. (Bloomberg).
“The CBN wants to take its regulatory onus to frightening proportions,” analysts at SBM said in an e-mailed note on Friday in response to the new draft law. This is taking policymaking insanity to a whole new level.
What is unfolding in Nigeria is a debacle of spectacular and monstrous proportions worthy of a Nollywood movie all of its own.
Aly-Khan is a financial analyst