Volatility and markets. Pending reforms…

Wild rides in markets with volatilities at highs and unpredictable sustainability.

Alarming graphics on the VIX (fear gauge index for covering market risks) reflect an aggressive surge on expected volatility. Worth to note that the VIX has shot up more than 300% in the last days. But despite all the noise, key reasons behind the market fall might not be so bad. New signs of inflation and wage rise, which is natural and shows signs of a growing economy, is not necessarily negative in a context where fears of deflation have been ruling for the past years. To some extent, the comeback of inflation and salary growth is the natural result of a heathy economy close to full employment, which is the case of the US.
But maybe there is a less obvious read-through behind the news that has more to do with policy makers and their unorthodox measures. Is lowering taxes a wise move on an 8th year of an upswing? In already booming equity markets, is it advisable to extend the bull run by lowering taxes and increasing corporate profit?. There is a clear risk that tax cuts can lead to lower tax revenue collection, thus leading to a wider debt burden piling up in an already over-indebted country.Talking about debt, is the new supply of debt closer to 80% of GDP now approaching 20 trillion an important factor behind the 10-year yield rise to 3%?. We will soon know how skeptical markets are about this. Not so much on the measure, which seems right, but on the timing!.

After a promising 2017 in Latin America (with Macri and Piñera wins leaning to the center right) now another exciting election year comes, with key and unpredictable elections in the leading two economies (besides Colombia, Costa Rica and Venezuela) with convicted Lula leading the polls again in Brazil. In Mexico, leftist front-runner Lopez Obrador is exploiting its rethoric against Trump’s wall as the key argument to win elections, arguing that US president «will end up asking Mexicans to come and work».

And back to scratch. Immersed in a political lockout, Spain is way behind the pack as statistics seem to indicate. Whilst key countries in the Western world have bounced back into growing a healthy 15-25% rebound, Spain remains at pre-2008 levels, (10 years after!!) only above Italy and Greece. And now, Spain is clearly slowing down after the Catalonian circus. PP politicans are looking the other way in the key reforms which should focus on tackling the 17% unemployment levels, the highest, only after Greece, among developed countries. PP and central bank governor’s comments regarding current levels «as acceptable and not alarming to prevent popular uprise» do not help the case.

They must be kidding!  Why is Portugal back to 7% and almost at near full employment? Is Spanish finance Minister De Guindos focusing on his European vicepresidence candidacy and forgetting the local issues?.

And a few words on the local corporate world. Key changes in Abertis, which will certainly turn into a soap opera war as we predicted months ago. Despite Brookefield’s bid over ACS yieldco, ACS/Hotchief does not have a balance sheet to swallow a $20 bill acquisition without a plan or another “big daddy”. The Iberdrola change is also worth to mention. CEOs accept the resignation of his “high profile” government friendly foe (another golden parachute)  on a fully rebellions attitude against the government stance towards the sector. Are these a fading PP’s final blows, as action turns now to a «Macronian » Albert Rivera to revitalize Spain and bring some fresh air and hope?.

We will keep an eye on new events…

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