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Morning Brief – Thursday 17th

EUREKA!

 

The Pound Sterling has enjoyed and Archimedes-esque Eureka moment. Hopefully, it won’t be caught short running nude through the street to brag to its head of state anytime soon… For the first time in a good while (if not ever) it has been the words of Jeremy Corbyn that kick started the rise in value within the domestic currency. Corbyn, around 11:25, proclaimed to an audience of Labour Party activists in Hastings that a second referendum “was on the table”. Alongside confirmation from Downing Street this morning that the Prime Minister will allow informal votes to gauge confidence on her Plan B(s) on Monday, the rhetoric from Corbyn suggested that Brexit Referendum II could gather a majority. Accordingly, markets raced to reward the Pound with an additional 25 basis points of value – as seen within GBPEUR below.

 

 

 

 

HSBC publicly announced that they are shifting their stance towards Sterling to bullish, willing to hold long positions on the Pound. Analysts at HSBC have suggested that should a second referendum occur and should the public vote to abandon Brexit, the Pound could rally by as much as 20%. The forecasts certainly seem optimistic, however, these perceptions do contribute towards understanding an appetite for British assets at different outcomes of the Brexit impasse.  

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 16th

May Might Miss March M(deadline):

 

 

Sat in the pursuit of a synonym for ‘deadline’ that begins with the letter ‘M’ all for the sake of alliteration, it’s easy to let the tumultuous world of Brexit pass you by. Foreign exchange markets seem just as carefree unable to displace the Pound more than 0.01% since market open this morning! There were residual signs of swelling risk. In the options market, high demand for risk reversals saw Sterling’s implied volatility fall for contracts with a late-March expiry whilst call options appreciated in value relative to put options, suggesting Sterling upside rather than downside is the fear. In the Sterling spot market, a sudden and short-lived rally through 1.13 was observed as headlines erroneously hinted towards a delay in the Brexit deadline. When the government lost last night’s vote on the Brexit deal, Sterling spiked upwards. The reason that traders and analysts have attributed to the appreciation is that the defeat left May’s deal so dead in the water that it was inconceivable, what with the decreasing probability of a no-deal Brexit, that the UK could leave by March 29th, therefore inviting a softer and more thorough Brexit. Today’s continued rally stands as testimony to this view. However, last night’s rally following a day of losses undeniably represents a liquidation of short covering and positioning moving into the vote. With the vote of no confidence tonight, we’re in for another evening of salience and turbulence. Hold onto your hats!   

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 15th

THE NOES HAVE IT; THE NOES HAVE IT!

 

 

In a dramatic series of events this evening, Theresa May’s conservative government has lost the first pivotal Westminsterial vote on her Brexit deal. Suffering a vote of no confidence as a result of her landslide loss in her government, Theresa May’s government is limping but still standing, at least for now. In the minutes leading up to the vote and in the seconds that followed it, Sterling took a dive, selling off in swathes and droves. Despite a losing majority of 230 votes (432 to 202), traders failed to punish the Pound, instead rewarding the Pound with an additional value of 1.36% against the US Dollar and 1.18% against a similarly appreciating Euro. A loss of this scale has not been seen since 1924 amongst a disunited British parliament. The appreciation in Sterling appears to be driven by a liquidation of short Sterling positions, allowing the British Pound to climb higher. Murmurings across the wires also suggest that the devastating defeat diminishes the probability that a majority could be found within Parliament, therefore leaving the exit plan dead in the water. In turn, given the increasing improbability of a no-deal Brexit, the corresponding probability of a Brexit in and of itself decreases, lifting the Pound. The story of the Brexit deal is not over and parliamentarians will return tomorrow to debate the no confidence vote. Let the rat race begin!

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 11th

Pause for Thought:

 

 

Markets at the end of the first full week of 2019 have a lot of data and global political risk factors to process and try to make some sense of. Aside from the slew of economic data due out in the UK today, yesterday’s results from the flagship High Street stores were mixed but overall were reflective of the broad downward shift in trading at the end of 2018. The FTSE has recovered to stand at 7000 this morning and the DJIA is at 24000 and Oil (West Texas Intermediate-WTI) is at USD 53.

 

 

Stock markets are disappointed by the lack of concrete detail on the US-China trade talks and are trying to make sense of President Trump’s latest pronouncement regarding declaring a state of emergency on border security. Just as a reminder the border in question with Mexico is 2000 miles long of which 600 miles has been fenced or walled, so understandably construction on such a scale is causing heads to be scratched as to whether that is the best use of the US budget.

 

 

In Currency land the US Dollar enjoyed a small rally last night with GBP slightly lower due to ongoing Brexit uncertainty, the Euro holding above USD 1.15 and the growing suspicion that GBP is underpinned-caution as ever should be exercised on that as that view is only supported by the belief that a No Deal Exit is NOT going to happen. Firstly, that unfortunately could happen and secondly a poor deal which is both expensive and hobbles the UK will hardly advance the cause of GBP! Next week’s vote in Parliament promises to exacerbate that GBP uncertainty.

 

 

Have a great weekend!

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 10th

When the going gets tough…

 

 

It tends to keep on going! Another glance at the parliamentary arithmetic that Prime Minister Theresa May faces, this time by the BBC, shows just how great a task is standing in front of the British premier next week. As reported last night, the hand of the UK government in the eye of the British public and Parliament has weakened, with two pivotal votes forcing May’s cabinet to stomach the reality of publishing their Plan B within days of a defeat on the Brexit bill. The government was also left wounded when parliament voted to forbid the cabinet from raising government spending to compensate for a lack of certainty and investment if it were to pursue a no-deal exit from the European Union. As reported today, it appears that May is in even greater peril ahead of the vote than we thought.

 

The publication from the BBC today reported that of the 650 MPs present in the House of Commons, May is looking at a losing majority of 227 votes. Based upon the public declarations of many MPs across all parties and the persuasions of each group of members, the broadcasting service reported that the government is only likely to accrue 206 votes. The result comes as research groups and polling institutions continue to suggest that the public as well as parliamentary opinion of the government is deteriorating. Sterling continues to be choppy despite trading within a tight range, losing a net 0.06% on the day on a trade weighted basis.

 

Tomorrow morning will see a flurry of data released for the UK economy. Confidence in the UK economy has remained surprisingly high despite the turmoil that political discussions have generated. Strong UK data will be pivotal to keep the Pound well supported within its present trading range.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 9th

Stock Check:

 

Pun intended, let’s take a look at how our three biggest headline risks have evolved. Any fall out from our biggest risk, the trade talks in Beijing, was closely watched by markets. As the US delegation travelled back to Washington and murmurings continued in the Chinese capital, the heads of those observing were spinning. The overwhelming impression of the talks was positive, however, contained a degree of silence and secrecy. The secrecy and quietism in and of itself tells markets a lot about the talks and it’s good news! Tight lips from both sides of the talks led investors to the conclusion that progress has been made to a degree significant enough in order to deserve a coordination in the wording of their respective statements. If this suggestion is confirmed, the meeting of higher-level officials to confirm the longer-lasting arrangements will proceed in due course ahead of the late-March deadline.

 

In reaction to the news, the US Dollar lost considerable value as defensive demand that has pervaded for so long was unwound. The US Dollar is the underwriting instrument of most of the globe’s trade and as such receives a bid during times of trade turmoil even when the inhibition to trade involves the US itself, much to the defiance of common sense! The Pound has suffered mildly today as traders um and ah about the effect of Parliament’s amendment’s to the Prime Minister’s trade deal.

 

Theresa May and her government have lost two sizeable battles on the Brexit deal(s) to be voted upon next week. The first came last night, with a defeat of 303 votes to 296. The majority included 20 of May’s own Conservative back bench and former cabinet ministers. The motion to amend the finance bill would now require the government to consult Parliament in order to seek consent to raise spending in the event of a no-deal Brexit. There are two diametrically opposed effect of this deal. Positively, and perhaps overwhelmingly, the amendment reduces the perceived profitability of a no-deal Brexit, hopefully diminishing the overall probability that the government will choose to pursue one. Negatively, the defeat demonstrates the fallibility of the government’s command over the wider House, suggesting to markets the deal is destined for eventual failure.

 

May was defeated once again this afternoon with Parliament requiring the government, with a majority of 308 to 297 votes, to declare its Plan B to parliament in the event of Parliamentary defeat. This is a blow to parliament, reflected in weakness in the Pound this afternoon, because it enhances the benefits of a parliamentarian if they vote against May’s deal next week. Despite a short-lived rally up to 1.28 on the back of a weakening US Dollar this afternoon, the negative news at home has forced cable back to the middle of its intraday range.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 8th

Well, well, well…

 

What have we here! Scarlet Johansen riding in on a shiny unicorn, big hitters landing in Beijing and German recession. Alright, I admit, the unicorn wasn’t shiny but still, these are three shocking headlines that have each stamped their mark on global foreign exchange markets today.

 

Prime Minister Theresa May has hosted her first Cabinet meeting of the year. With a lot to discuss with a heavily divided group of ministers, Sterling drifted onto the back foot upon news of a lack of definitive progress and resolution. The star of the Avengers crept her way into headlines following the reported remarks of Environment Secretary and Leave proponent, Michael Gove. Speaking out at those still disaffected by the incumbent deal due to be voted upon next month, he and Justice Secretary David Gauke are reported to have collaboratively compared the dissident members to middle-aged men holding out for movie star Scarlett Johansen riding in on a unicorn!

 

The lack of apparent consensus building within Theresa May’s own cabinet dashed hopes in the afternoon session that she could get a parliamentary majority next week. It’s not exactly a revelation that the Conservative cabinet is deeply divided. Its members have been public in their endorsements of various versions of Brexit: from a second referendum and most permutations of soft-through-hard Brexit. If May cannot get a full and competent force behind her for the vote informally scheduled for Jan 15th, she’s destined for trouble. Critically, a government spokeswoman has denied reports that the UK is enquiring with the European Council about the permissibility of extending the Article 50 deadline.

 

In Beijing, President Xi Jinping’s senior advisor has arrived at talks between the US and Chinese delegations that are sat in order to discuss a resolution to the so-called trade war. The presence of the unscheduled visitor and contributor has suggested to markets that Chinese authorities are keen to progress with a serious deal. The overnight news weakened the US Dollar during the US and Asian sessions to the similar detriment of the Japanese Yen and the Swiss Franc, two other classic safe haven assets, as global risk sentiment softened. Today is the second and final day of scheduled talks so pairs of eyes will be spit East and West as markets look for domestic reactions to talks overnight and into tomorrow.

 

The Euro has remained well-bid despite dismal economic data publications at 10AM this morning. German industrial production plummeted 1.9% on the month in November, reflecting an aggregate annual decline of 4.7%. Industrial and construction sectors are national champions of the industrious core EU member meaning that today’s readings were of heightened salience to an already shaky European economy. The market reaction to the news was muted in foreign exchange and equity markets as investors instead looked towards the progress in trade talks in Beijing as an overwhelming positive force for global trade. The performance today was serious enough to even hint towards a minor technical recession in Germany during H2 of 2018. With an already over-spilling basket of risks within the Eurozone, the EU could really do without its strongest and largest economy drifting out of positive growth.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 7th

Take a pew:

 

Across the globe, some of the most important political and technocratic figures participating in some of the most closely watched and intensely documented global risks sat down at their respective tables for serious discussion. From Beijing, to Westminster, to Washington, discussions unfurled with huge potential consequences for global foreign exchange markets. In a day that has seen Eurasia group, a large and respected political risk consultant, attempt to categorise and rank global risks it still seems ambitious to rank these risks. But let’s try anyway. 1, 2, 3, in that order:

 

Likely to be the biggest risk to systemic global growth, representatives from China and the US met in Beijing for the first day of a two-day face-to-face summit. From the US side, the delegation consists of big-hitters from the agricultural, energy and treasury departments. Carrying the mandate of President Trump, who inspiringly reminded markets yesterday he thinks that “things are going to happen”, the delegation is hungry for a deal. Today’s reports emanating from the Chinese capital confirmed this view, suggesting that both sides are there to make a serious and lasting deal.

 

The importance of finding a resolution to the trade war is hard to understate. China can boast to having the worst performing major global equity market of 2018, with losses in the last 6 months alone standing proud above 22%. At the same time, whilst admittedly also facing challenging and adapting domestic monetary conditions, US stock indices have suffered considerable losses. Shown below, the Hang Seng index of Chinese equities and the New York Stock Exchange Composite Index can be seen to fall in tandem as the trade war took grip.

 

 

If negotiators on both sides fail to reach agreement ahead of their March 2nd deadline, an escalation in mutual tariffs is supposed to be automatic. US levies on $250bn worth of Chinese exports currently exposed to a 10% tariff would see the sanction rise to 25%. Similarly, a further $267bn worth, the remainder of Sino-US exports, would be up for further future tariffs. The US is looking for commitments to respect US intellectual property in China and a commitment to purchase US goods, whilst an ailing China desperately needs the artificial inhibitions to trade removed. If a deal is struck, defensive Dollar demand that continued to support the US Dollar throughout late 2018 will be relieved, allowing the value of the greenback to fall substantially. Positive global trade sentiment therefore adds to the downside risks facing the Dollar in 2019.

 

In London, and second on our list, Parliament resumed following the recess. The Brexit vote is still scheduled for next week, with Prime Minister Theresa May reaffirming her commitment to honouring the already-delayed vote ahead of her self-imposed January deadline. Over the coming days and the next two weeks, a flurry of Brexit-related headlines will be sure to generate a volatile Pound.

 

Last, but not least, Washington remains in partial shutdown for its 17th day. That makes the 2018-19 government shutdown the third-longest in history with any willingness to resolve the conflict between the House of Representatives and the White House still out of sight. With the US facing uncertainty at home and abroad, resolving the shutdown rapidly will be key to preserving Dollar strength. However, it’s no secret, what with his attacks on the Federal Reserve Bank and explicit affirmation from Steven Mnuchin, the President’s own Treasury Secretary, Trump might rather enjoy a weaker US Dollar. Perhaps, then, the Dollar’s run is over.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 4th

Elephant in the Room:

 

With two death-defying stunts performed by firstly Mr Trump over the Christmas period and secondly a rollercoaster ride in the Japanese Yen overnight on Tuesday, I’ve managed thus far to avoid the sometimes hard and always intimidating subject of Brexit. Four days into the New Year I can hold my tongue no longer! Can the United Kingdom really have a no deal Brexit? What are the options and what’s coming up?

 

 

 

 

The possible outcomes of Brexit, albeit simplified, are largely exhausted by the diagram above. Ultimately, represented above by the timeframe “beyond”, there are three options: Hard, Soft, and None. We’ve known that from the beginning. Following the vote on 23rd June 2016, either Brexit was going to happen, or it wasn’t. If it happened, it would have been somewhere on a variable scale between the hardest of hard Brexits and the softest of soft Brexits. What is critical about SGM’s analysis above and what has only become fully clear in the past weeks as the process has continued, is how we get there.

 

From the diagram above it is apparent that the UK can only crash out from the hardest of hard Brexits, what I have called here a “cliff-edge Brexit”, is only achievable in a forecastable timeframe if the government explicitly choses to pursue it. This is apparent from the no-deal scenario upon which the government must chose to put it to the people, extend Article 50, or take the plunge. So how did we arrive here?

 

Well, we have been reminded time and time again, even in the first few days after the declaration of Article 50 by its very own author Lord Kerr, that article 50 is reversible. Given that the government, and not parliament, has the mandate to control the declaration there is always another option besides cliff-edge Brexit. Similarly, with the implied probability of a second referendum approaching 50% based upon bookmakers’ odds, the permissibility of asking the public once again appears to be growing.

 

The reality and uncertainty of a no-deal cliff-edge Brexit is what has had Sterling markets panicking for almost three years now. The possibility is largely to blame for the 15% discount in the Pound in the days following the vote to leave and weak Sterling support ever since. However, given the possibilities available to the government unilaterally, without any external control or meddling from parliament, it is apparent that no-deal Brexit is no-go unless the government decides to take it.  

 

The evolution of Brexit that has led me to this conclusion appears not to have been priced in by markets, with the probability of a no-deal Brexit remaining well priced in. I’m confident that the probability of a no deal Brexit is still priced in because the implied volatility within the Pound is above that of emerging markets, at 14%, its highest in decades. And herein perhaps lies the silver lining! Sterling appears to be unnecessarily cheap ahead of parliament recommencing their debate on May’s deal next week. Snapping up the Pound now could well prove to save a pretty penny.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 3rd

January Flash Sale:

 

What in the world was that?!… I faintly hear you ask. Well, it was an opportunity for incredible value for the brave and woeful losses for the fearful! Take a look below at exactly what the dying hour of the first trading day of 2019 decided to deliver:

 

 

 

Dollar-Yen (USD/JPY), perhaps the golden compass of FX markets, is shown above. Yesterday, the cross posted its biggest intraday move in years, falling from around 109 Yen to the Dollar down and through the 105 level. Crashing by around 4% in less than 15 minutes, markets scrambled to understand exactly what was going on and what was causing such unprecedented moves.

 

The best explanation so far suggests that amidst and already risk-off environment to FX markets, the publication by apple of a downgrade to its sales forecasts catalysed intense selling pressure and a removal of cash from equities and into saver confines: The Yen. With Japanese markets still on holiday, sparse liquidity is thought to have forced a series of retail investors’ stop loss orders to trigger with active markets unable to fulfil the flurry of automated requests flying across trading desks across Asia. The event was fleeting, however, did leave its mark across the board.

 

Dollar Yen quickly recovered, albeit at a slight discount (approximately 1%) versus its pre-crash levels. But look elsewhere:

 

 

 

The Pound crashed by 1.37% in 13 minutes against the Euro. The story was much the same against the US Dollar in the chart above. The sudden discount in the Pound versus its major international counterparts in an immense opportunity for value creation and one of a magnitude that historical volatility would normally require weeks to prevail. Belief in the move and purchasing the Yen, selling the Pound and other weakening assets would have resulted in serious losses in the coming minutes and hours. However, taking a leap, calling the bluff, and bucking the trend could have left you up to 7.75% better off had you taken a gamble!

 

The lesson? Anything is possible! Particularly in the uncharted territory of 2019, what with a trade war still at large; Italy’s 2019 budget down but by no means out; BREXIT; an attack on the fed… So? Use the technology available… SGM offers you 24-hour trading opportunities via our new prepaid currency card platform and automatic execution orders.

 

Good Luck!

 

Discussion and Analysis by Charles Porter

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