20160728 – DAILY UPDATE

PRICES

The FOMC announcement after the meeting makes clear that further rate rises are a possibility in 2016. It looks like the stronger than anticipated jobs data from the start of this month has persuaded FOMC members that the labour market is regaining momentum and near term risks to the US economy are diminishing. Rates were unchanged of course, no one ever expected them to do anything this time around. It was always going to be about the outlook of the Federal Reserve, and clearly Brexit concerns are receding. After the announcement the dollar initially rallied but quickly reversed.

20160728_eurusd

 

For your guide, there are 3 more FOMC meeting left this year, and it is a reasonable bet to expect a rate rise at one of these meetings. Given the election later on this year, one would expect it to happen sooner rather than later, September would be my guess. The Federal Reserve is still likely to keep a close eye on the global economy and they have left themselves enough room to delay action if data in proceeding months turns out to be more negative than expected, so all eyes no doubt will be watching activity in the UK – don’t pay too much attention to the UK growth numbers yesterday, that relates to activity before Brexit.

 

It’s certainly interesting to note that the Fed has not reacted as negatively to Brexit as the IMF for example, as they have still maintained their growth forecast for the US economy. Surely if they were in tune with the IMF then the negative outlook for the global economy as a whole would have also impacted the US economy. Some FOMC members did however state that they would prefer to see more signs of an inflationary threat before hiking rates further.

 

I don’t see the reversal of the initial dollar rally as a sign that the dollar is going to get weaker from here. Rather it looks to me that the market, which was already starting to price in the possibility of further hikes this year, is seeing a bout of profit taking. Granted the dollar could sell off further in the coming days, but this only opens the way for a renewal of a bullish dollar trend. As I mentioned in a recent blog, the case for the dollar to appreciate versus its European peers remains strong to me, indeed it’s been reinforced by the Fed’s pronouncement. Look across the Atlantic and you’ll notice that both the Bank of England and ECB are far more likely to ease monetary policy in the coming months. Once again the major central banks are moving in opposite directions, it’s hard to see why that won’t see EUR/USD and GBP/USD eventually moving lower as well.

 

 

 

 

 

 

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20160727 – DAILY UPDATE

PRICES

Not much to report today. The post-Brexit data keeps rolling in, so far not great for the UK as expected, but all in all not terrible according to surveys for Germany and Belgium. This doesn’t mean that the Eurozone won’t be negatively impacted, but it’s what we’ve always known… the most direct impact surely has to be on the UK economy, and the second derivative impact on the Eurozone will be contingent on how bad the effects of Brexit will be on the UK economy.

 

Elsewhere we’ve seen some mixed data in Asia, with stronger than expected GDP data in Korea, but weaker industrial production data (and declining) in Singapore, and also weaker trade data in Hong Kong. While the trade balance in Japan does look better, this is primarily because of a slump in imports which doesn’t speak well for global trade. On the other hand, home sales in the US paints a picture of a robust economy, but again on the negative side, survey data for services in the US disappointed somewhat. A fairly mixed picture globally, but to be honest, mixed is better than some of the more dire predictions leading up to and following on from Brexit. It will probably take a few months of data to build up a case either way, on where the global economy is heading.

 

Major currencies still look to be trading in corrective complexes for the moment, but it’s worth noting that oil exposed currencies aren’t the best performers at the moment, whether you look at the Russian rouble, Nigerian naira or Mexican peso. For now, we maintain a slight bias towards a stronger dollar, if only because most of the easing bias is likely to come from central banks other than the US Federal Reserve. We’ll get to see that view tested later on today, with the FOMC decision in the European evening. The key question to come out of the meeting will be the Federal Reserve’s latest assessment of the US and global economies. That could set the tone for a currency market that has been largely range bound for the last week or so…

 

 

 

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20160726 – DAILY UPDATE

PRICES

When Natwest, one of the main UK High Street banks issues a notice to its corporate customers that there is the possibility of the bank applying negative interest rates to their deposits you can almost take it as a certainty that rates are going lower in the very near future. Most expect the Bank of England to announce a rate cut in August, and this is as clear an indication of that as you can get. The situation becomes even clearer when you hear the likes of Martin Weal, a member of the Bank of England’s monetary policy committee, having seen the negative business surveys published after the referendum stating that he now thinks immediate stimulus to the UK economy is necessary. We may have not seen the last of sterling weakness, brace yourselves.

 

Trading volumes have risen as the S&P has made new highs, this is normally a good signal that the trend is likely to be persistent and a genuine breakout has occurred. The post global financial dynamic of markets reacting positively to anticipated stimulus continues. As things stand it’s likely we’ll see stimulus from both the UK and Eurozone central banks. In a way it’s odd to see oil quietly retreating from the highs as has been the case in recent weeks, but perhaps the snippet I put into a recent blog – the US is now exporting gas to the Middle East – is a more powerful indicator of the state of play than the effects of more stimulus.

20160726_oil

Elsewhere it’s clear that the Nigerian central bank has managed to bungle what seemed like a sensible devaluation plan. On reflection, an effective freeing of the naira should have led to a more rapid convergence of parallel and official market rates than we have seen so far. Certainly, with supply and demand reaching a balance of some sort, we would not be observing (and experiencing) such a severe shortage of dollars as is currently the case.

20160726_usdngn

 

 

 

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20160722 – DAILY UPDATE

PRICES

The ECB, like the Bank of England before them chose a cautious ‘wait and see’ approach to the post-Brexit situation. It’s easy to see why, there hasn’t really been any significant data announced yet that gives us a clear picture of what activity has been like after the referendum. Perhaps that changes this morning with a raft of European country PMI data to be announced in the next few hours. If as feared it signals a slowing or even contracting of economic activity then all eyes will turn back to the central bankers. Both Governor Carney and President Draghi stated that they are ready and willing to take action if circumstances demand it, so we will watch to see if this bad data will be enough to convince them of the need for action. Both central banks, it should be pointed out, are already at or close to the zero bound so their capacity for action isn’t what it was before the global financial crisis, but still, they will surely be able to do something. My guess is that the solution, from their perspective will involve attempts to weaken their respective currencies, so the likely reaction to poor data later this morning will be a stronger dollar and weaker euro and sterling.

 

Elsewhere the dollar is already weighing on the Nigerian currency, the naira, following the publication of IMF forecasts for negative growth this year. It has been an extremely tough environment to sell naira in recent days as the chart below illustrates…

20160722_usdngn

Finally, Donald Trump has officially accepted his nomination as the Republican candidate for President of the United States and gave a long, and sombre speech putting forward his case. One of the things I noticed was that he talked about ‘Americanism’ as opposed to ‘globalism’. In recent days he has talked about the US not necessarily supporting their NATO allies if there was ever conflict in Europe (Russia presumably being the threat in such a scenario). I can imagine that some world leaders are horrified by both of these points. All I can say, having observed the EU referendum, is that truth, particularly from “experts” or members of the elite or establishment is being ignored by electorates at the moment. What seemed like a publicity stunt a year ago suddenly feels very serious. It is ironic that his opponent, Hillary Clinton, as establishment and elite a personage as you could find, is probably precisely the wrong person to be waging this fight. The irony being that she may rightly be distrusted for many reasons, but the truths she will try to speak to defend America’s historic positions are unlikely to be heard because so many are unwilling to trust her. I await her speech at the Democratic convention, it will be interesting to see if she can put forward a case for hope, and an admission of past mistakes that will persuade enough of the American electorate to pull back from the abyss. Because as things stand, it seems that Trump can say what he wants and his followers will believe him, while Hillary will not be forgiven for any perceived untruths, that is one heck of an advantage.

 

 

 

 

 

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20160721 – DAILY UPDATE

PRICES

Equity markets continue to make fresh highs, some of them anyway, as risk sentiment remains on a robust footing. It certainly didn’t hurt that the UK economy got some welcome news yesterday, with the unemployment rate falling to an 11 year low. Bear in mind though, that data is a lagging indicator and is reflective of conditions that existed before the referendum vote. Wage growth remains anaemic though, and it would be hard to believe that current circumstances are conducive to further acceleration, considering the IMF’s recent downgrade of UK growth prospects.

 

While sterling started yesterday under pressure, it managed to recover somewhat, and there is no confirmation yet that we are in the next phase of a downtrend. In fact this morning, both sterling and the euro are stronger versus the greenback. All we can do is keep watching and see if key levels get challenged. Indeed yesterday, sterling actually outperformed the euro, which traded in a very tight range versus the dollar, and this trend continues today. All in all, not a huge amount of excitement for the currency majors.

 

Today we get the ECB rate decision, and it’s quite likely that President Draghi will be forced to consider additional monetary stimulus following Brexit. Depending on what he announces this could inflict some damage on the euro. It’s worth noting though that even more quantitative easing poses a rather unique problem for the ECB. One of the guidelines for the national central banks regarding their sovereign debt purchases is a restriction against buying debt which yields less than -0.40% (yes the minus sign is appropriate), but in the case of Germany, where the Bundesbank has to buy the largest component of Eurozone debt, this restriction is becoming a problem, given the fall in yields after the EU referendum. What to do, what to do!

 

The IMF has been busy, and its work is one of gloom. According to the IMF, Nigeria’s economy is expected to show negative growth this year, and the naira has weakened in the wake of the announcement. The convergence between the official rate and the parallel market continues apace, and at the moment it seems to be the case that the official rate is doing most of the work.

20160721_usdngn

 

 

 

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20160720 – DAILY UDPATE

PRICES

It’s really starting to look like the next leg down in sterling is beginning. As I said in a recent blog, I’m loathe to call it until we make a new low. Elliotician’s (practitioners of Elliott Wave Theory) will know what I mean by this… it’s always difficult to differentiate between a ‘B’ wave and the start of a new impulse wave until you get reasonable clearance from the previous low. Not only is sterling weakening but the euro is as well, which is what I expected for the next leg down, don’t get me wrong, sterling is underperforming the euro at the moment, but it’s not looking good.

GBP/USD…

20160720_gbpusd

EUR/USD….

20160720_eurusd

Why should this be happening now? Well… Prime Minister May has made a political calculation which is feeding market uncertainty. It’s either genius on her part, or a horrible mistake. The political calculation I’m making reference to is her decision to stall on pushing ahead with Article 50 which will trigger the exit of the United Kingdom from the European Union. I mentioned in a recent blog, that following discussions with Nicola Sturgeon, the Scottish First Minister, Prime Minister May has determined that Article 50 will only be triggered with some buy in from Scotland. I can well understand her desire to maintain the integrity of the United Kingdom, but the short term cost is uncertainty. I will never be able to say this often enough… MARKETS HATE UNCERTAINTY. This is what we’re experiencing right now, as businesses come to terms with a lack of clarity regarding the United Kingdom’s relationship with the European Union. What we’re seeing at the moment are stock markets trying to hold on to recent gains, but I have to say, European bourses in particular (not including the UK markets) do not look great. The recovery since Brexit was announced has seen some bourses around the world make new highs – particularly the FTSE 100 and S&P 500 – but not Continental European stock markets. The recovery we have seen for Continental markets have been distinctly corrective. If they turn, and turn hard, I suspect they’ll take global markets with them.

FTSE 100…

20160720_ftse

DAX…

20160720_dax

Economists – the “experts” that the former UK Minister Gove dismissed, are increasingly pessimistic about the outlook in the UK, and consequentially the Eurozone. Investment is likely to take a big hit while the uncertainty persists, and there’s no reason to believe, given Prime Minister May’s decision that this state of affairs will change this year. Indeed the IMF has just cut 1% point of UK growth forecasts for 2017, and that’s not their worst case scenario! A former MPC member was on tv last night suggesting that the Bank of England should act decisively to add liquidity to the UK economy. If they get it wrong what’s the worst that could happen, higher growth and asset prices, but to get it wrong could lead to a significant fall in output. What does he think we have to fear? Falling business investment as long as uncertainty persists, falling house prices too (already reports are coming out showing sales of new London homes are at a 3 year low). Let me just add, if some of the doom sayers are right and house prices do fall, this could set off a feedback loop into consumption in the UK that will be hard to correct. In that scenario it is clear that the Bank of England will be forced into an aggressive programme of quantitative easing

 

You don’t have to be a genius to figure out what the implications for the currency markets are. If the Bank of England does nothing, or doesn’t respond quickly enough, we could see confidence and investment fall, leading to further significant declines in sterling, and I believe the euro will also be affected albeit to a lesser extent. If the Bank of England does act, then sterling will still fall. Quantitative easing tends to do that to currencies, but perhaps the euro will be less negatively impacted. Either way, this all looks very very bad for the pound. We might look back at GBP/USD trading at the 1.30 levels with some fondness in a few month’s time. This does not look good at all!

 

 

 

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20160719 – DAILY UPDATE

PRICES

While consensus seems to be that UK equities will benefit from the Brexit induced fall in sterling, HSBC has stated that there could be a sharp reversal in to the end of the year with a forecast that UK equities will finish the year about 7% down from here. If global equities continue on with this powerful bull run, and bearing in mind that the FTSE 100 index is heavily populated with international stocks it’s hard to see how HSBC can be right on this. But it bears watching. One area where there seems to be agreement is the fact that UK equities should outperform European equities though.

 

Militants are becoming increasingly active in the Nigerian Delta region frustrating Nigerian attempts to maintain current production levels. The insurgents are a reflection of the anger felt in such a resource rich region where living conditions are fairly poor. I fear this is a state of affairs that is likely to continue unless a new settlement is reached to pacify the ethnic minorities in the Delta. Meanwhile the official naira rate continues to converge towards the parallel market rate. It is entirely possible that by the end of the year this process of convergence will be complete. We continue to believe that there’s a case for the parallel market to end the year much stronger than the current position.

 

The Chinese economy, at least according to the official data, appears to be chugging along with 6.7% GDP growth in the second quarter which is unchanged from the previous period. Government stimulus and a strong property market seem to be the main contributors.

 

I thought this was deliciously ironic so I couldn’t resist mentioning it, the US has now started to export gas to the Middle East. Yes, you’re not mis-reading, it’s actually happening! The Republican Presidential convention has started and Donald Trump is expected to set out his case later on in the week. This could be a key moment, as we will get to see if he can put forward an argument that can appeal to a wide enough section of the electorate. The convention has not been without drama though, with attempts by those opposed to him to disrupt the event. They weren’t successful, but this is a reminder that even within his own party there are those who are ardently opposed to him.

 

I’m not sure there’s much to say specifically about currencies today. After the frenetic trends of recent weeks, we appear to be in some sort of consolidation period. Sterling continues to be the focus, and this morning it has weakened a little bit, but still well within the range of recent days. We continue to believe that the case for more sterling weakness is the most compelling theme at the moment.

 

 

 

 

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20160718 – DAILY UPDATE

PRICES

Sterling weakened into the close on Friday.

20160718_gbpusd

At this stage though, it would take a new low to convince me that that’s the end of the recovery. As I said in a previous blog, the odds do favour more sterling weakness, but perhaps it’s too soon for that. You have to factor in all the profit taking from traders who have been short gbp. Once they’ve booked their profits the way should be clear for more sterling weakness. Indeed Credit Suisse recently suggested that fair value after Brexit might be in the low 1.20s, when you consider that the threat of monetary stimulus from the Bank of England is still in the air, it’s hard to dispute their valuation. Furthermore, Andy Haldane, the Bank of England’s chief economist has suggested that he will support significant monetary stimulus in August. If that’s the case, then any pound sterling bounce from here is going to be of the limited variety. The new normal may well be a 1.20 handle for GBP/USD, but at the moment I’m still trying to process the implications of the recent discussions between Prime Minister May and Nicola Sturgeon the Scottish First Minister regarding Britain’s exit from the EU. It might be nothing, it might be something, watch this space.

 

 

 

 

 

 

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20160715 – DAILY UPDATE

PRICES

The MPC met, and the Bank of England announced that they would maintain rates at 0.5%. As I suggested in yesterday’s post sterling was likely to strengthen in this scenario.

20160715_gbpusd

The FTSE also fell on the news, but to be honest it wasn’t a big deal in the scheme of things as the index didn’t lose much in percentage terms on the day.

20160715_ftse

For the life of me though I don’t understand why the media has described the outcome as a surprise. What am I missing here, looking at the economist forecasts, the predictions were for 3 votes to cut, and 6 to hold, in the event we got only one voter pushing for a cut and the rest elected to remain on hold. Yes that’s a slightly more hawkish stance than expected, but listening to the BBC and reading the FT, you could be led to believe that a cut was actually expected. Hmmmm… I confess I haven’t looked at the front-end of the fixed income market, perhaps that’s where the answer is to be found.

 

There continues to be negative commentary regarding the fate of the UK economy, with Larry Fink, the CEO of BlackRock warning of a Brexit induced recession, with as much as 2% taken off UK GDP. I would love to argue against this, but the lead up to the EU referendum unquestionably affected business sentiment and activity. Even now, it’s hard to say that key decisions are being made as many investors and businesses wait to get a clearer picture of how the UK manages its exit from the European Union. There are key points that need to be clarified, not least, are some businesses going to move operations from the UK? What will happen to house prices? How much of the Eurobond business will the City of London retain? Clearly it’s best to characterise the MPC’s decision today as changeable, if the data is as bad as the doomsayers say a cut is still likely. This means that there really is no reason to expect a substantial rally in the pound from here. It’s possible that news over the coming days might be sterling positive, but eventually it’s all about the economy, and the prospects are gloomy. On that basis, we still expect the pound to continue its depreciation trend. This time it would probably make sense for the euro to weaken as well, albeit much less so than the pound. Expect the dollar to be the winner in this zero sum game.

 

Prime Minister May’s ministerial appointments continue to be announced. Not much to say about most of it for now. But… Boris Johnson as Foreign Secretary? This is either a stroke of genius or folly. I’m leaning towards genius myself, but for those who haven’t seen this, have a look at the reaction of one of the leading Labour politicians, this is not an atypical reaction in the UK. I think it’s genius because he is actually an extremely intelligent man who can be very charming and charismatic. He’s got a lot of work to do, given the insulting rhetoric he employed during the referendum campaign. It’s genius because he is clearly no friend of the new Prime Minister, but he’s too big a beast to ignore. As the Don said in ‘Godfathers’ keep your friends close, but your enemies closer. I believe President Obama employed the same tactic when he chose Hillary Clinton as his Secretary of State. Time will tell. Boris seems to have been right about one thing, word is discussions are already under way between US and UK trade officials. Perhaps they didn’t lie about everything after all.

 

 

 

 

 

 

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20160714 – DAILY UPDATE

PRICES

Today the MPC meets at the Bank of England to determine whether interest rates need to be changed. You’ll recall in the aftermath of Brexit, Governor Carney suggested that rates might have to be cut. The question, following the appointment of Theresa May as the new Prime Minister is considerably different from the scenario everyone thought would arise. At the time, it seemed likely then that there would several weeks of campaigning before the new Prime Minister was selected, but events have moved much more quickly. So the question is.. does this change things? After all there is considerably less uncertainty in the market now than there was before, and in fact sterling has been rallying, although it had a somewhat weaker close yesterday. There are other factors of course, not least the prediction that the UK is likely to enter a recession in the coming months following the significant drop in business forward investments caused by Brexit. Indeed, economists also expect the Eurozone economy to be negatively impacted in the coming months as well. In any case, the forecast from those same economists is for only a small number of MPC voters to advocate a cut, so in all likelihood we’ll get no movement in rates, but a very cautious statement about the outlook for the UK. That in itself will be enough to impact sterling, so the thing to look for is how dovish will the MPC be relative to expectations. We’ll know later on today. In front of that, I don’t expect traders to take big positions because it really is on a knife edge. I don’t have much to say about the new ministerial appointments, we’ll need to see what they say and do over the coming days and weeks to form any opinions on changes in UK policy.

20160714_gbpusd

Elsewhere risk sentiment continues to look very positive. OPEC is becoming more positive on the oil outlook, despite an overhang in inventories. They’re predicting $60 up until 2018. Good luck with that.

 

A brief mention regarding Japan, and Prime Minister Abe’s victory, last Sunday, in the Upper House elections. He now has the mandate to push ahead with discarding pacifism from the Japanese constitution. There are huge geopolitical implications with this, not least Japan’s tense relationship with China, but on a higher level the interaction between China and the West is likely to be the most significant foreign policy issue of the 21st century. This is something to monitor in the years ahead. First the Japanese Prime Minister will push ahead with a fiscal stimulus for the perpetually ailing Japanese economy. Quite how this is possible with an already massive government deficit, I’ll leave to those with more imagination than me!

 

Finally, the polls seem to be turning in Donald Trump’s favour. I’m reminded of an observation in the great tv series ‘The West Wing’… “Republican’s always poll better than Democrats when the focus is on security issues”. After the Dallas shootings perhaps we shouldn’t be surprised. A long way to go yet, but it certainly doesn’t seem as if we should anticipate a straightforward coronation of President Hillary Clinton. Brexit should have taught us all that by now…

 

 

 

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