Snapshots is settling into the new year, European dealers and investors are adjusting to trading in a MiFID II market structure and the risk markets are sprinting out of the starting blocks.

Greed and fear

The tone of all the MiFID II compliant research flooding our inbox is overwhelmingly positive.  The MiFID free blog-sphere paints a similar picture.  Global growth at 3.7% is the highest in seven years and is widely expected to continue.

We said that 2017 was the end of ultra-loose monetary policies.  That leaves 2018 as a year of tightening but still loose monetary policies.  So far there has been no impact from Fed balance sheet normalisation policies other than to cheapen the price of treasury bills and notes.  However, valuations in liquid markets are tight and leave little margin for safety if growth disappoints.

Systemic leverage

We recently caught up with a large dealer in correlation products and were interested to learn that their volumes in synthetic CD0s have bounced back to a third of pre-crisis levels.  The good news is that dealers are now selling the entire capital structure so risk is being dissipated into the market and not being retained.  We do worry about some of the family offices who we hear are buying the super senior risk from these deals on leverage.  We hope they have spare capital to meet any margin calls they may incur!


The UK didn’t participate in the global growth boom last year and growth is expected to drag during the transitional phase of Brexit negotiations.  However, unemployment remains low and the stock market is booming as the cheap pound is buffering the economy.  We think the Sterling credit markets are too pessimistic. They trade cheap to Euros and USDs and we are finding pockets of value in them.

and Italexit

Italian elections are scheduled for March 4th and we are watching them very closely.  Berlusconi (as you would expect) has all the bases covered.  He seems willing to form a coalition with the incumbent PD which will keep the status quo but he has formed an alliance with the Northern League and the Brothers of Italy (run by a woman no less!) who stand on an anti-Euro platform.  Under a scenario where the alliance wins a majority we think discussion about parallel currencies could resurface.  We do not think parallel currencies lead to a European breakup as long as they are capped at a percentage of GDP and used for the domestic economy.  We believe they are more akin to the IOUs California issued during the financial crisis.  However, we want to retain some buying power if the market over-reacts.

Good luck in 2018.

Asif Godall
Co-Chief Investment Officer