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Morning Brief – Friday 30th

Back to the Future:

 

The last trading day in November reflects a calmer end to a frenetic week both economically and politically and nowhere more so than in the UK where news headlines have been dominated by Westminster and Brussels rather than IACGMOH and hot favourite Harry Redknapp.

 

However, for those who think it’s all over, think again: we are in for more volatility especially in the next two weeks leading up to and immediately after Theresa May’s moment of truth in Parliament on 11 December when MPs vote on the EU Exit deal and by implication on the PM. SGM-Foreign Exchange will have our very own

 

Charles M. Porter in the studio at TalkRadio giving his views on the markets as events unfold. Do not miss it!

 

This weekend world leaders’ jet into Buenos Aires for the G20 talks in an atmosphere of rising international trade tensions especially between the USA and China. Markets are looking for progress on solving those and are also watching the oil price carefully with WTI having fallen 21% this month and trading below $50 a barrel, the question is will it go lower or has it found a floor?

 

Below $50 and those shale producers will be having a tough time. MBS Crown Prince of Saudi Arabia who arrived first in Buenos Aires for the G20 will no doubt be trying to do a flurry of deals with other Leaders to distract from the story that threatens to break out again on the murder of Jamal Khashoggi.

 

The European Inflation 30-11-18 flash release at 1000 GMT today came in a little lower at 2% and with GBP trading at 1.2775 versus the USD and 0.89 versus the Euro, markets are certainly not convinced that UK plc has got itself a great deal and the prospect of future prosperity as part of the European divorce settlement.

 

So, looking forward…. for those of you who are not used to routine moves of 1% in GBP on a daily basis, its Back to the Future! Have a great weekend.

 

Today’s Global Market:

 

Discussion and Analysis by Humphrey Percy

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Morning Brief – Thursday 29th

Powell’s Put:

 

 

Jay Powell, Chair of the Federal Reserve in the United States, has reignited the debate of monetary policy within the world’s dominant currency. The US Dollar has faced a considerable headwind following the speech by the Reserve bank chief. The Dollar has given back ground to an appreciating Euro, with EURUSD dropping a 1.12 handle to trade in the high 1.13s throughout the day. The pair briefly broke 1.14 at 13:30 UK time, however, found considerable resistance, retreating back to the middle of its intraday range. Yesterday evening’s speech by the relatively new central bank chairman need not have signalled the Reserve’s intention with respect to monetary policy given the planned orientation of the speech. However, highlighting the present policy rate band (2.00-2.25%) as very close to the neutral rate led investors to question how much further the Fed was prepared to go. With a rate hike priced in for December to a considerable degree, markets immediately priced out 2019 rate rises, leaving only one firm policy change for the whole of 2019. The sudden reaction to Powell’s words led to a concomitant sell off in the underlying Dollar, however, did offer considerable scope for equity markets to rally. The Pound has failed to catch a bid today as May’s parliamentary position continued to appear weak. Labour is rumoured to be considering a second referendum if May’s Brexit bill is defeated in the House of Commons on December 11th. Tomorrow, Eurozone price and output data will be read with particular attention on Italy, providing considerable risk within the European single currency.

 

 

Today’s Global Market:

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 28th

National Interest:

 

In a busy afternoon for global central banks, currency markets have been highly volatile. Perhaps the most significant publication of this afternoon was the Bank of England’s economic assessment upon monetary and financial stability given certain possible Brexit outcomes. The much-awaited publication responding to the House of Commons Treasury Committee attested to reasonable economic and financial certainty should the UK achieve a deal and continue with economic partnership with the European Union. The forecasts allowed for moderate divergences in economic prosperity depending upon the integration of trade post-Brexit, from a close to rather vague “less close” relationship. However, projecting a 25% depreciation in the value of the Pound Sterling under a condition of no-deal is compounded by the assumption of no transitional period. The implications of the Bank of England’s assessment include a GBPUSD rate of 0.96. One great British Pound would be worth around about 96 cents. If one can bare to consider the exchange rate of the Pound against what would presumably be an ailing Euro, the rate is close to 85 cents to the Pound. A visualisation of BoE Governor Carney’s forecast is included below:.

 

 

 

 

 

Markets should now be questioning where the mandate for economic and political security lies surrounding the Parliamentary vote schedule for the evening of the 11th December. Should the Pound evolve to attract a 25% discount given an extremely disorderly Brexit then the competitiveness of the United Kingdom would increase dramatically. However, with our greatest trading partner eliminated and the reversion back to a World Trade Organisation rule book, the advantage of competitiveness is necessary and dramatically reduced. In only a couple of week’s time, members of the House of Commons must ask themselves: is this the Brexit that the public of the United Kingdom voted for on 23rd June 2016? If it is, then economic partnership should be the path forward. The alternative, a vote to reject the deal, must either then result in a no deal or an extension or suspension of the Article 50 process. With Jay Powell, the Chairman of the United States’ Federal Reserve Bank, speaking at the time of writing, it is clear Trump’s admonitions to the central bank may have been heeded. Speaking of the need not to go too fast with the normalisation of monetary policy for fear of choking domestic growth, markets priced out value from the US Dollar, questioning its ability to deliver future value.

 

 

Today’s Global Market:

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 27th

Wobbly Trump:

 

The White House has changed direction once again, lashing out at China and Brexit in one foul swoop. Attacking Brexit, Trump said that the deal is not a good deal for the United Kingdom; instead, it favours the European Union, prejudicing British trade and independence. Drawing from dubious foundations, Trump also noted that the deal could prevent the UK from trading with the United States and other critical trading partners during the transition period. Speaking ahead of the G20 Summit taking place on Friday and Saturday of this week, Trump drew into question scenarios that had been assumed as given for several weeks. For a long time now, markets have priced in the possibility of trade resolution between the conflicting trading leviathans of China and the United States. However, news has come to market that should Trump and Chinese President Xi Jinping not agree upon a trade resolution this weekend, further tariffs upon billions of dollars’ worth of Chinese exports could be levied. Moreover, the tune of tariffs is up for negotiation, with sanctions anywhere from 10% to 25% being discussed. The two increasingly protectionist states must agree to trade more freely upon a level playing field, affording mutual access to each others’ markets. Following increasing defensive demand, the US Dollar has appreciated moderately, clawing back the 1.13 resistance level against the Euro. Should the two states agree to suspend the inhibitions to trade (that have been generated through the levying of tariffs) global growth forecast would be revised upwards. The increase in risk appetite could prevent the Dollar from appreciating further, however, the opportunities for domestic economy growth will offset this effect. Despite the crisis unfolding in Italy day by day, Mario Draghi, President of the European Central Bank, has reaffirmed his commitment to normalise monetary policy by the end of this year. The asset purchase program that the ECB has embarked upon since promising to do “whatever it takes” to save the Eurozone now stands at a colossal $2.6 trillion. Removing the ultra-accommodative monetary policy is imperative for the Euro to recover value and stick to the timetable of hiking interest rates following the summer of 2019.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 26th

Deal!

 

Brexit news has not been hard to come by this weekend. Numerous speeches from the UK Prime Minister, Theresa May, both in Brussels and in Westminster today, have shed a lot of light on Brexit. However, one thing that has been clear for weeks remains transparent; getting the (now agreed) deal through UK parliament is a task that seems insurmountable. In order to persuade a lower house majority to accept the deal it would be necessary to persuade several key interest groups to back an arrangement that at present seems unpalatable for them. Whilst waning Brexit sentiment has also hindered the Euro, evolving sentiment surrounding the fiscal intentions of the new Italian coalition have afforded European assets room to appreciate. Despite tensions escalating throughout the weekend between Rome and European institutions, news this morning from Matteo Salvini allowed Italian risk sentiment to improve. Accordingly, the spread between German bunds and Italian ten-year debt that had widened throughout the weekend, found room to recover. This technical move has improved sentiment behind the Euro and allowed it to appreciate. Amidst political turmoil throughout Europe, global risk sentiment and impressions of global growth soured. This allowed the US Dollar to catch yet another bid driven by defensive demand and investors’ hunt for a safehaven. It has been announced this afternoon that parliament will meet on 11th December in order to vote on May’s deal. With May’s European counterparts having signalled over the weekend that this is the final deal and it shan’t get any better than this, everything is on the line for the December meeting. May’s campaign to convince Members of the House of Commons to back her deal is well underway with investors unconvinced of whether the Parliamentary arithmetic can be swayed into May’s favour.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 23rd

Brace, Brace:

 

As Thanksgiving gives way to Black Friday, markets have been particularly thin, allowing for considerable volatility within the world’s major currency pairs. The considerable swings in the US Dollar this afternoon could have been a result of limited US trade today, constraining the available supply of US Dollars, however, is more likely to represent traders’ anxiety moving into the weekend. Today, President Trump has met with his Chinese counterpart, President Xi Jinping at the G20 summit in Argentina. As the two respective leaders of the two trading Leviathan’s meet, global markets have braced. Given the escalating trade tensions between China and the United States as the presidency of the controversial Mr Trump has evolved, markets are fully aware that a lack of cooperation between the two countries could result in further tariffs, constraining already waning global growth. Given the Dollar’s position as the world’s largest reserve currency and ultimate safehaven, investors have flocked to it in droves for security.  At the European close this afternoon, the Dollar had gained one quarter of one percent on a trade weighted basis. Despite the Dollar’s appreciation, cable has defended a 1.28 resistance level, however, the Dollar has continued its advance through the 1.13s against the Euro. With the Prime Minister of the United Kingdom, Theresa May, meeting her European counterparts in Brussels this weekend, considerable risk has been priced into the Pound and the European single currency. Losing a comparable 0.1% on a trade weighted basis throughout the day, with the Euro being hampered further by weak German PMI data this morning, investors appear unsure of what this weekend will bring for Brexit. Part of the leaked document yesterday has already allowed the Pound to gain back considerable ground. However, should a lack of resolution be found with European counterparts, particularly surrounding the Spanish objection to the Gibraltar compromise, there could be far more downside within Sterling. The ever-increasing correlation between the Pound and the Euro under changes in the outlook for a post-Brexit trade deal necessarily suggests that any fall out within GBPEUR will be limited over the weekend.

 

 

Today’s Global Market:

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 22nd

Ambitious, Broad, Deep and Flexible:

 

We’ve heard the words before. Now they’re in the right place. Theresa May in the past has levied criticism at the European Union for a lack of ambition within Brexit relations, refusing to think outside of the box of incumbent treatises to facilitate a post-Brexit relationship between the United Kingdom and the European Union. She has also accused her European counterparts of demonstrating a lack of flexibility in their approach to negotiations, unwilling to entertain ideas that might facilitate progress. Indeed, facing a domestic audience, Theresa May has frequently claimed she is seeking a broad and deep agreement that will support the UK through its exit from the bloc and continue to nourish the economy following its separation. Now, however, the words are not up in the air, accusations, or fantasy. They are the substance of a leaked document thought to be the agreement that the EU and UK will discuss and sign this Sunday in Brussels. The document sent Sterling markets through the roof, with almost 1% being added to the value of the Pound. Immediately, comments from the European Union suggesting that there remain inhibitions to the Brexit deal threw the Pound back down to the lows of its open. In yet another rollercoaster move, the domestic currency recovered to hold its value for the rest of the day.

Good value in the Rand has been found this afternoon following the two-day meeting of the South African Reserve Bank, the private body responsible for domestic monetary policy. Despite the relatively new recession in Africa’s largest economy, the Reserve Bank has chosen to raise rates by 25 basis points bringing the yearly interest reward/cost of money within the South Africa to 6.75%. The increased reward for holding the domestic currency attracted attention and demand to it, with the currency gaining 1.7% versus the US Dollar since market open. In an unexpected move, the actions of the central bank today have helped to secure the recovery of the Rand following the emerging market currency crisis of September.

 

 

Today’s Global Market:

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 20th

Stock Check:

 

The US Dollar has been the major out-performer of the day, driven by a significant selloff in US equities. All major US stock market indices have closed in the red, with technology stocks leading the dive during the overnight Asian session. Household stock names including Apple suffered immense losses during the premarket session, opening more than 4.5% below Monday’s closing price. Apple, like many US stocks, now trades at more than a 20% discount versus its highs last month, perpetuating underlying fears surrounding earnings growth and trade tensions. The selloff in the tech sector and across equity markets in general has driven investors to liquidate their holdings in company stocks and shares, instead holding their assets in the underlying US Dollar. The flight into cash and safer US Treasuries has generated a demand for the US Dollar that has allowed it to appreciate some one quarter of one percent on a trade weighted basis since market open. Defensive demand for the world’s major reserve currency in the face of an intensification of President Trump’s trade war has helped determine the demand for US cash, driving cable towards 1.28 and breaking key support of 1.14 against the Euro. On the European front, Brexit demands and concessions continue to create obstacles to May’s Brexit deal that was announced last week. Chief EU negotiator Michel Barmier has warned member states that their idiosyncratic demands and concerns should be constrained as fear surrounding the stability of May’s working majority and domestic popularity grow. Sterling has managed to largely hold onto its value throughout the day, however, markets want news, and fast.

 

Today’s Global Market:

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 19th

Brexit Bears:

 

The Pound continued to dive during Friday’s US session, with the Pound trading just shy of 0.89 pence per Euro. As leaders of both major political parties in the UK participated in televised debates, further light was elucidated upon the Brexit deal. Around midday, Sterling took a considerable dive through, momentarily dipping through 1.12 within GBPEUR and even breaking through 1.28 against the US Dollar. The dip coincided with news reports that Spain was dissatisfied with the incumbent Brexit deal, believing it to be against the domestic interests of Spain. Sterling traders have shaved value off of the Pound since the Brexit deal emerged alongside a flurry of cabinet resignations. Last week’s bearish Sterling tilt has been precipitated by concerns over May’s domestic political stability. However, with ratification of any deal within the European Council being drawn into question as well, the Pound continued to suffer. Within cable, the Pound fell by approximately 0.65% within a matter of minutes. The Rand weakened following a strong start this morning amidst a combination of Dollar strength and further fiscal concerns. Domestic fiscal pressures compiled as the IMF warned that South Africa’s next budget should include debt limit in order to shore up support for its underperforming domestic soft debt. Volatility throughout the global economy continues to remain elevated with the VIX holding onto a 20-handle.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 16th

Picking up pennies:

The Pound has recovered from yesterday’s woes. However, a fragile 0.2% appreciation on the day offers Sterling markets little commiseration with EURGBP and GBPUSD both trading slightly below the mid-point of their medium-term range. The Pound received a good bid following a confirmation from The Times that Michael Gove will not resign from May’s Cabinet where he presently holds the position of Secretary of State for Environment, Food, and Rural Affairs. Following a flurry of seven resignations, the positive affirmation from one of the co-heads of the Vote Leave campaign has allowed the Pound to enjoy a small degree of breathing room, grabbing back 4/10th of one cent against the US Dollar and the Euro since the European market open. The European Central Bank President Mario Draghi spoke this morning at his last (annual) European Banking Congress in Frankfurt. The board’s comments afforded some value to the single currency due to their continued isolation from the fiscal crisis in Italy and projection towards 2019 policy normalisation steps. The US Dollar has faced a headwind overnight as an agreement or deal between China and the United States during this month’s G20 summit looked increasingly unlikely. The Dollar fell on these remarks, deflating the optimism that the US president had shown markets earlier this month.

 

Today’s Global Market:

 

 

Discussion and Analysis by Charles Porter

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