Monday, January 19, 2009
Another day, another bailout. This time it's on the east side of the Atlantic, where the UK authorities have organized another capital injection/loan guarantee program for (some of) Britain's troubled banks.
Last Friday, the feel-good rally in equities and sterling was rudely interrupted by a late-session swoon by some of the UK banks deemed most vulnerable, a turn of events sufficiently troubling that "Flash" Gordon Brown and his Darling sidekick have organized another bailout.
Flash Gordon may have saved the world with his earlier bailout, but he didn't manage to save RBS, still reeling from its catastrophic acquisition of ABN Amro little more than a year ago. Not even Ming the Merciless could lose £28 billion in a single year, but RBS managed the trick. The good news for RBS longs is that there is good long-term support on the chart 28p below the current price.
At the same time, the Bank of England has been given the power to buy turds...err...assets from banks to help them shore up their balance sheets. Roll on quantitative easing, UK style! The question is how low Merv and co. might want to take rates in conjunciton with any asset purchases. Macro Man has a sneaky suspicion that they'll be reticent to trim below 1%, though that hasn't stopped the short sterling strip from rallying a bit this morning.
Sterling the currency has come under a bit of pressure, however, as the market engages in a knee-jerk "sell the quant easing currency" Pavlovian response. EUR/GBP has traded up 2p from Friday's lows, and GBP/USD has shrugged off early-session strength.
But surely we've seen this movie before? The market had a pop at the dollar (for whatever reason) in December as the Fed moved to quatitative easing....and the buck has subsequently retraced most of those losses.
While Macro Man comes second to no man in his disdain for Flash Gordon, in his view the UK's troubles are pretty fully priced into the currency markets. Macro Man calculates fair value for EUR/GBP at roughly .75, making the pound some 20% undervalued against its European neighbours. While that is not necessarily a catalyst for an immediate sterling rally, EUR/USD in 2008 demonstrated what can happen when the valuation rubber band stretches too far.
So Macro Man is shockingly somewhat constructive on sterling in the medium term, though there can of course be plnety of short-term setbacks.
In the meantime, Macro Man looks forward to Flash Gordon claiming victory with his latest initiative. There is, however, no word yet on whether he will change the national anthem from "God Save the Queen" to something more up-top-date from Queen: