SGM-FX View of london

Morning Brief – Monday 31st

Banks: Do what we say (and not what we do) Dollarwise

 

 

All those exposed to currency markets whether corporate or private clients need to have a view on where the USD will go in 2019. The consensus from bank forecasters is that the USD will weaken in 2019 and especially in H2 2019 because weaker US economic growth will force the Federal reserve to cease their announced rate rise programme. However what readers should know is that at the same time the CFTC-Commodities Trading Futures Corporation- which sees the lion’s share of all outstanding Exchange Traded contracts has announced that the present level of contracts taken out by banks in the expectation that the USD will rise has never been higher! So, readers should be mindful that this is another case of the banks telling their clients do what we say and not what we do!

 

 

The fact remains that the USD is still the world’s prime reserve currency and all countries keep a high proportion of their reserves in US Government bonds and hence remain holders of USD. Therefore, do not expect to see any sizeable weakening in the USD especially in H1 2019 as the strains on the Euro will not be going away any time soon with French and Italian political challenges and the forthcoming European elections taking place between 23 and 26 May.

 

 

So, all eyes down for an eventful 2019 which will, we confidently predict, still be hugely influenced by President Trump and his itchy Tweeting fingers, European politics and nearer to home…yes almost managed not to mention it, Brexit!

 

 

A Happy and Prosperous New Year to all of our clients!

 

 

Intraday Major’s Performance:

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 28th

Another Brick in the Wall:

 

The US stock market rallied sharply after the London close last night wiping out the losses and posting a gain of 1.14% on the day. The FTSE has similarly rallied in relief this morning currently up 100 points. So, what is the volatility all about? Rising US interest rates in 2019, the shutdown of US Government departments, doubt over President Trump’s wall across the Us/Mexican border and last but not least the key indicator from China which showed industrial companies’ profits declining for the first time in 3 years. In a nutshell, the US markets are reacting to the realisation that economic growth will begin moderating in H1 2019. The more rational market watchers will already have realised that this is hardly new news as most of the factors in the list above have already been well known for some time, so this is more a case of markets having over reacted in both directions prompted by lower volumes due to the holiday period.

 

As Pink Floyd snarled: “We don’t need no education, we don’t need no thought control, no dark sarcasm in the classroom, teachers leave those kids alone” in their 1979 Another Brick in the Wall. Well those kids are the ones who -yes you guessed it -are the ones marching the markets up and down. A bit of thought control would help see them through these market gyrations: volatility is going to be continually present for the short term.

 

So, for you Pink Floyd fans out there and especially President

 

Trump, the last line goes:

 

All in all you’re just another Brick in the Wall

 

 

Have a great weekend!

 

 

Intraday Major’s Performance:

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 27th

Chinese Takeaway:

 

 

With an absence of liquid London markets and a dearth of political news with President Trump in Iraq, it is a chance to turn to the city of Yiwu in north eastern China. Why and what? This is a city of 1.2 million comparable to our own Birmingham (1.1 million) with an enormous market and more specifically an enormous ecommerce market supplying the likes of Amazon UK and US with goods manufactured in China. With all eyes on a US/Sino trade war one might expect Yiwu to be traumatised as to what might become of their market business. While understandably concerned, Yiwu has a different take on this: instead of sending goods direct to the US, they have developed a cost effective export business to other countries such as Mexico where the goods are then on shipped to the US-job done! So what can we deduce form this? While a trade war is hugely concerning if it were to develop further, there is a separate parallel but nevertheless huge ecommerce market that circumvents national borders and allows consumers to access goods at favourable prices avoiding expensive tariffs. One thing is for sure: those huge container ships one sees with forty foot containers piled up on top of each other delivering every conceivable consumer good to all points of the globe will be busier than ever in 2019.

 

Yesterday admittedly after some woeful pre-Christmas performances, saw the Dow Jones Industrial Average gain 4.98% or 1086 points-the single largest one day gain EVER! As I have written before get ready for a return to higher volatility in all markets in 2019.

 

Meanwhile le petit Napoleon himself, President Macron has been forced to cancel his ski-ing holiday in the completely obscure French Pyrenees resort La Mongie and go into hiding such is the strength of feeling that has been ignited by his “progressive” policies. This will mean that his ability to shape the succession politics of the new ECB head will be curtailed and the Finn, Erkki Liikanen is currently in the lead position to be announced on February 15 as the successor to Mr Draghi.

 

 

Have a great day!

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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SGM-FX View of london

Morning Brief – Monday 24th

Ding Dong Merrily:

 

But not on (a) high: This year has not ended with a traditional Santa Rally and the FTSE has ended the year down 12.12%. Looking on the bright side, a lot better than the Shanghai Composite which was the worst of the major stock markets with a 24.85% decline in 2018. Sterling has found a range for the past few weeks and awaits the next chapter in the unfolding political saga here in London.  Putting that aside for the next week or so here’s hoping that Santa brings you all that you wish for!

 

From all of us here at SGM-FX a very Merry Christmas.

 

 

 

Today’s Global Market:

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 21th

Sterling: not just for Christmas

 

 

 

With a collective gasp of relief, Parliament has headed off for the Christmas break to refresh itself for the forthcoming debates and voting slated for January. Currency markets similarly to Parliament have reflected this by regarding Sterling and where it is headed as next year’s problem. Narrow ranges in Sterling pairs today reflect the dearth of news-unless the Gatwick drone story floats your boat and qualifies as market relevant news rather than a major pain in the neck and a chance to hear words of wisdom from Jeremy Clarkson as to what he hopes lies in store in Santa’s sack for the perpetrators of the drone flights

 

 

But this pause in activity and the last weekend before the Christmas break, gives all of us the chance to reflect on where we are with our Sterling view and what movements are likely in early 2019. Interestingly a good number of market commentators are talking Sterling up in the New Year. Why? Because a UK exit deal will transpire and that will be better for Sterling than no deal. Taking the converse of that argument, no deal for the UK will be worse for Sterling.

 

 

Short term we expect that it is far more likely that consensus-yes consensus IS still possible among our lawmakers(!)-is reached to apply to the EU for an extension to Article 50. Why? Because realisation is dawning with less than 100 days to go that in the event that a deal is reached with the EU that is acceptable to parliament AND parliament votes to approve it, there will be insufficient time before the end of March to pass it into law. So, what happens then?

 

 

Sterling is more prone to a setback in the next month while this scenario plays out. If there is no deal, Sterling will certainly become weaker. If there is an extension applied for and approved, Sterling will steady and appreciate in the short term, but any longer-term appreciation will depend on a perceived good deal for the UK. That looks a challenge right now.

 

 

So, the message from the SGM-FX elves is that Sterling is not just for Christmas but needs to be carefully considered for the New Year.

 

 

Have a great weekend!

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 20th

I got 99 problems… and Brexit will be Won?

 

Or will it?! The 99 days up until the 29th March 2019, the proposed Brexit date under an unamended Article 50, will each represent a huge challenge to the Pound, and a potential problem with the defiant Prime Minister, Theresa May. The Pound Sterling endured increased trading volumes today yet managed to maintain reasonable levels of volatility and evade excessive price action. Retail sales data kicked off the morning in the United Kingdom, posting performances both above the previous reading and, critically, significantly above consensus expectations. Concerns of weak sales performance in recent days have hit the value of a number of household-name companies, most notably ASOS, a stock that fell by more than 40% in one day this week. The improved outlook for economic activity allowed the Pound to secure a foothold from which to attempt to appreciate.

At midday today, the Bank of England published its latest interest rate decision. As expected, the Bank left interest rates on hold in a unanimous 9-0 vote within the Monetary Policy Committee of the Bank. However, Sterling threatened to fall back from the footing that retail sales data had afforded to the domestic currency when the Bank also revealed in its minutes that there was a “considerably” higher uncertainty surrounding the UK’s exit from the European Union. Despite the hazy picture that the Bank painted surrounding the date scheduled for 99 days’ time, its forward guidance remained largely stable: under an orderly Brexit there is scope for the Bank to raise rates. In a busy day, the Pound closed almost exactly where it had started off.

In the United States overnight, a hike-decision from the FOMC did prevent a mass exodus from US Dollar positions, proving that the Fed won’t bow down to political pressure from the White House. However, its forward guidance and famous ‘dot-plot’ – the publication that anonymously surveys policy setters’ expectations for future monetary policy – did show one less hike in 2019 than it has previously attested to (2 in 2019 versus 3; consistent 1 hike in 2020). The Fed’s admonition that the future path of monetary policy will be determined by the robustness of economic data is what caused the sell-off in today’s US Dollar in European markets. Introducing a previously non-existent degree of uncertainty to US monetary policy, the Dollar’s main driver of strength (its newfound interest rate differential) was brought into question.

 

Discussion and Analysis by Charles Porter

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SGM-FX View of london

Morning Brief – Wednesday 19th

 

Di Maio My:

 

Italy held its general election on the 4th March 2018, with a new and unstable government emerging in the subsequent weeks, populated by the dominant Five Star Movement and The League parties. The teachings of the new coalition were of fiscal profligacy, spending their way out of what they saw to be unfair public spending restraints, and a general disdain for the European project itself. With the second highest national debt level in Europe for the past ten years, coming a close second to Greece, it is unsurprising that the consolidation of the new government was watched closely by European institutions, with disagreements erupting to the surface in recent months.

Italy’s fiscal intentions incurred the wrath of the Commission who voted that should Italy not propose a reformed and constrained spending plan, it would be forced to invoke the fiscal imbalance procedure; a punitive mechanism to fine Italy for the risk it is posing to its Eurozone neighbours. A lack of reconciliation within the interactions between the populist coalition and the European Commission has visibly hampered Eurozone economic confidence, the Euro, European and, in particular, Italian equities. However, a breakthrough in negotiations today has seen the Euro enjoy one of its best intraday performances this month and also allowed Italian and European stock indices to recover ground.

 

 

 

 

The above chart shows EURUSD, measuring the value of one Euro against US Dollars (brown), the FTSE MIB, Italy’s favourite stock market index (orange), and the Euro Stoxx 50, the index measuring the performance of the largest corporations within the Eurozone (blue). The graph demonstrates that since market close yesterday and following the news jointly emanating from Brussels and Italy, Italian and European stock and the Euro have all gained value. The strong bid, particularly in the Euro and Italian domestic equities, represents the market’s sigh of relief at the residing tensions. Today, Rome and Brussels achieved a resolution on Italy’s 2019 budget, helping to ensure stability within the Euro and allowing progress between Italy and the EU. This will not be the last clash between Italy’s new government and Europe, and I’m sure Luigi Di Maio, Giuseppe Conte and Matteo Salvini will not be inviting their counterparts in the Commission to Christmas lunch, however, Italy can continue to spend after Christmas.

In about two hours’ time, the Federal Reserve Bank will publish their interest rate decision for the last time in 2018. The event will be closely watched with yield curves stagnating in the US, threatening a seemingly inevitable recession and putting stress on financial markets. A hike decision, considerable taper, and strong forward guidance will be imperative to restore full strength to the US Dollar.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 18th

Take the Victory!

 

Fed wobbles, stocks stabilise, and we start from square one once again. President Trump has launch yet another attack at Jerome Powell’s Federal Reserve Bank for its observably hawkish approach to US monetary policy. The reserve bank will meet tomorrow to decide whether to raise its domestic interest rates for the fourth time in 2018. Interest rates in the United States of America currently operate within a band between 2.00 and 2.25%. At present the market is still pricing in a 25-basis point hike to the lower and upper bound of this rate following tomorrow’s meeting. However, Trump’s vitriolic attack on the Reserve yesterday highlights just how much popular, political and market criticism there is against this decision:

 

 

The interest rate differential between the United States and the rest of the developed world has been the major driver of Dollar strength throughout 2018. However, investors’ confidence and belief that the Federal Reserve will continue to normalise monetary policy beyond present levels is beginning to fade, opening the door to Dollar weakness. President Trump reinforced his attack on Chairman Jay Powell’s persuasion to raise rates today, once again turning to social media:

 

 

The criticism has led market participants to question whether the Fed might succumb to the political pressure that the White House is placing upon the supposedly independent monetary policy authority. Unsurprisingly, the threat to the Dollar’s driver of growth led to early selling pressure at market open this morning. However, following two consecutive days of declines within US stock market indices, early positive futures markets and a strong bid on equities at market open in New York supported the greenback and outweighed the concerns on monetary policy. If the Fed does not hike monetary policy tomorrow evening (UK time), the Dollar should be hindered by weakness amidst a glut in supply. Markets at the moment still expect a hike but it is clear from looking further ahead in the curve that they are seriously doubting the commitment of the Fed to raise rates in the coming months. A no-hike could signal the end of peak Dollar strength leading into 2019.

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 14th

Mumma Mia!

 

 

This What a week -and before you think I am referring to Theresa May’s shuttle around firstly the UK to sell her Brexit deal and then Europe to sell her Brexit deal (a theme is developing here) I am, but only in part as much else has been happening in Europe away from the events which explain our fixation on events in Westminster.

 

After widespread denials that it could possibly happen, Italy confirmed that after huge pressure from Brussels, it was indeed cutting its deficit target from 2.40% to 2.04% which means less spending and less borrowing for Italy-basta as they say in Rome. The sharp eyed among you will note that that involved transposing the last two decimal points; the suspicion has to be that it is a purely placatory measure rather than a serious intent. Nevertheless 10 year Italian bond yields declined to 2.9% and the spread of Italian Bonds versus German Bunds also narrowed. What has that done for EUR/USD? In a nutshell: nothing with USD 1.13 to EUR1 prevailing since the end of October when 10 year Italian Bond yields were 3.7%. What with Les Gilets Jaunes in France and the Little Napoleon Emmanuel Macron being under huge pressure regarding his reforms and TM’s European Tour, the stresses of the third largest European economy if one excludes the UK, should have given markets far more pause for thought. But not a bit of it, the European juggernaut grinds on remorselessly steered by unelected bureaucrats.

 

Yesterday saw the final European Central Bank Meeting of the year. As widely expected rates were left unchanged and an end to the ECB bond buying programme at the end of this month. ECB President Mario Draghi’s press conference briefing projected calm and assurance with Euro rates to remain low, growth to be 1.9% and inflation to be 1.8%- a near flat line performance that’s hard to get excited about.

 

So last but definitely not least for the UK and Europe, we turn to TM’s Oliver Twist moment at the dinner with 27 EU leaders last night when she asked: “Please Sir I want some more.” She had looked in turn for political support at home then political support away and unless Mark Rutte and Angela Merkel can prevail on the less sympathetic members of the EU it would look as if she will get nada, nul or nothing in the way of help from them.

 

So after a week that has seen GBP/USD fluctuate between 1.27 and 1.24 and GBP/EUR between 1.12 and 1.09, we prepare ourselves for yet another new concept to most of us: indicative voting on a range of Brexit options by the UK Parliament: Mamma Mia here we Go Again!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 13th

Buying’s Over:

 

This afternoon’s European Central Bank meeting briefly took attention away from the European Council Summit in Brussels today. In its last monetary policy statement of the year the European monetary authority confirmed that net asset purchases would end, as planned, ahead of 2019. To the detriment of the Euro, ECB President Draghi confirmed that quantitative easing remained within the central bank’s quiver. The asset purchase plan was the physical manifestation of the economist’s claim to do whatever it takes to save the Eurozone economy. However, from three simple words has come a stockpile of 2.6 trillion Euros worth of corporate and sovereign debt settled within secondary markets in order to stabilise soaring costs of debt that were stifling the Eurozone economy. Worth over a trillion US Dollars in debt each, the ECB has estimated that the emergency spending plan has shaved some 14% off of the value of a Euro in the past years since its announcement and employment. As Theresa May arrived in Brussels for the two-day summit Sterling investors kept a wary eye out. Sterling lost some value as a downbeat Prime Minister conceded that she was not expecting concessions to flow anytime soon. However, perseverance and optimistic news reports kept the Pound in positive territory on the day following the successful defence of her premiership.

 

 

 

Discussion and Analysis by Charles Porter

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