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Morning Brief – Friday 26th

Markets

 

At the beginning of this week 1USD would have bought you 42 Argentine Pesos. Today that has become 45 Argentine Pesos. A 7%+ devaluation in a week is dramatic for the already beleaguered Argentine economy and represents a record low for the Peso. This has affected all emerging markets. Generally the USD has strengthened further in the past 24 hours as investors have bought USD, Yen and CHF. GBP has weakened a little as markets mull the likelihood or otherwise of some Brexit progress as the UK Parliament returns to the fray. Apparently 34% of Scots do NOT want a second Referendum… which means 66% either do or do not know.

 

 

 

Germany and the EU and German Elections

 

The increasing strength for the AFD-Alternative for Deutschland-the ultra right wing party particularly in Eastern Germany is causing concern not just with Mrs Merkel but more widely in Europe. 30 years after reunification, there is a marked discrepancy in wealth between East and West regions of Germany. The AFD has struck a chord especially in Eastern Germany which is particularly intolerant of Islamic immigration which they blame Mrs Merkel for encouraging. European politicians are asking themselves if this is a wider trend.

 

 

 

The UK Housing Market and Mortgage Finance

 

Those who have mortgages that are interest only are growing in number all the time. While more “risky” since there is no capital reduction, this method of borrowing is driven in large part by non affordability of capital repayment mortgages of the size necessary to buy property. In 5 years time there will be 250,000 of these mortgages up for renewal and in 10 years, that number will be almost 900,000. That is not an issue if interest rates remain low but if not, there is a risk of negative equity and a financing crisis. If those without such mortgages or with no mortgages think this is not their problem, they are wrong as it will affect the market as a whole. Having said that, there is a solution to this and that is inflation, however unless carefully controlled, that has ramifications that go far beyond the housing market. In the near term, there have never been so many low rate interest only mortgage products on offer.

 

Why is this relevant? The answer is that the overseas housing market owned by Brits is very largely financed by savings and….the withdrawal of equity through mortgage finance from their UK properties.

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 25th

INDYREF-eree!

 

Yesterday’s confirmation by Scottish First Minister Nicola Sturgeon failed by rain on Sterling’s parade. Sterling finished the European trading session yesterday 0.3% up against the Euro and 0.2% against a strong US Dollar. Whilst the Pound eventually lost the battle against the US Dollar in New York trading hours, it did manage to hold its ground against most other currencies throughout the evening.

 

The 300-year partnership between Scotland and the United Kingdom was last put to the polls in September 2014 where the Scottish people, by a margin of more than 10% opted to remain a member of the United Kingdom. In fact, in this referendum, only four domestic councils in Scotland voted with the motion to become an independent country.

 

The people of Scotland account for a little over 8% of the total population of the United Kingdom with a comparable contribution to output on the economic front. The referendum was divisive on both sides of the Scottish border and whilst the direct impact upon the Pound is difficult to measure, you’d be far stretched to find a Sterling trader in the City of London that wouldn’t have listed the referendum as an important risk.

 

The second attempt at independence that Nicola Sturgeon has pledged to pursue before May 2021 will be another shadow of uncertainty due to hang over the UK political economy in the years to come. The margin between the Scottish Remain and Leave votes was two and a half times larger than the somewhat more infamous Brexit referendum and, without question, doubts surrounding the validity of a ‘do-over’ referendum will be raised.

 

A more imminent threat to Sterling was partially avoided yesterday evening. The 1922 Committee, a prominent and pervasive group of Eurosceptic MPs within Westminster, was pushing to change Conservative Party laws to undermine an internal party rule that its governing leader cannot face more than one leadership challenge within a 12-month period. This rule amendment has been rejected, however, the Committee is still calling for May to put a deadline on the premiership that she herself has promised to terminate following the successful negotiation of a Brexit deal. To bolster Sterling support further, the fiscal 2018/19 deficit weighed in at only a little over half the size of the previous year, making it the lowest deficit in seventeen years.

 

The US Dollar continued its triumphant advance. At the open of play yesterday the US Dollar on a trade weighted basis was already trading at a 22-month high. The previous trading session only added to these levels with the Dollar breaking the Euro down through key resistance levels. Meanwhile, several US equity markets also continued their unabating rally.

 

A dovish interest rate guidance by Bank of Canada’s Governor, Stephen Poloz, reminded markets of the interest rate disparity between the later-cycle United States and the rest of the developed global economy. The Canadian Bank removed a reference to the need for rates to return to a neutral range, stating also that a degree of accommodation must remain in Canadian rates of return. The Loonie weakened alongside these headlines, reinforcing the stronger Dollar.

 

Amidst broad-based Dollar strength, emerging markets including the Rand and Lira have become increasingly cheap in the past two days. Challenges to Istanbul’s election results in particular have weakened the Lira to levels not seen since last month’s elections.

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 24th

Markets

 

Have started the week in a positive frame of mind with the Dow recording a record high and its best performance since last September, oil firm with WTI at $64.04 and USD strong and unchanged.

 

 

In the Beginning… (Genesis) or Beresheet in Hebrew

 

The Israeli Beresheet moon mission ran into trouble resulting in a 300 mph “hard landing” on the Mare Serenitatis on the surface of the moon. Mission over this time but Israel has pledged to try again.
Never mind Arnie and “I’ll be back”. This is Aaron and he will be back!
SGM-FX’s Shekel desk are standing by when the Israelis shell out for the next spaceship with USD/ILS presently trading at 3.58….

 

 

Crossrail

 

Londoners in particular but visitors to the South East also will take comfort from the news that there are now 3 cases for the opening of the line as opposed to a news vacuum on the launch of the long awaited service as we wrote last month. Best case is that it opens in a year in Spring 2020; middle case is for Summer 2020 and worst case is Spring 2021. Great to see that there is now some accountability on the timing for this the largest infrastructure project in Europe. 17 minutes from Paddington to Canary Wharf means no more excuses for being late at your SGM-FX desk, Richard!

 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 23rd

A lot of sunburned Brits will be headed back to work today after the long weekend. All four nations of the United Kingdom enjoyed their hottest Easter Mondays on record, with Saturday also stealing the 2019 crown for the hottest day so far this year. My thanks go to the Met Office for these statistics that seem to justify my belonging to this universe of work-bound, sunburned, individuals.

 

Easter Sunday across the globe brought with it an unfolding series of devastating news from Sri Lanka. The suicide bombings that targeted three churches and four luxury hotels leaves at least 310 people dead and many hundreds more injured. Our private thoughts remain on the terror and destruction demonstrated in the nation this weekend.

 

However, to digest the global impact, let’s examine what this means for a nation that in a little over three weeks will officially mark a decade since the end of a quarter-century civil war.

 

Sri Lanka has a relatively large debt to GDP ratio for its level of economic development. Government debt is approximately 75% of annual economic output and tourism pays an immense part of bolstering public coffers to repay the interest on this stock pile of debt. At approximately $50bn in absolute size, the forthcoming debt problem from any faltering tourist revenues could not be brushed under the carpet indefinitely.

 

The outlook for the economy will therefore be determined by the success the government has in designing appropriate measures that balance public freedom and security in order to preserve the attractiveness of Sri Lanka as a tourist destination.

 

For now at least, with a manipulated exchange rate against the US Dollar, the forex story accompanying the Sri Lankan crisis this weekend is virtually non-existent. However, the long run flight of cash from domestic assets to overseas will put pressure on the artificial valuation and increase the cost to the state owned bank of defending the Rupee’s value against the US Dollar.

 

Sri Lanka’s stock market this morning is depressed, falling several percentage points from its pre-Easter weekend level. Whether or not selling off a country’s assets is right or not in the face of a public crisis is another debate and one that is constantly evolving, however, this morning’s financial realities should not be overlooked.

 

Over the weekend in the United Kingdom, Theresa May faced increasing pressure as cross party talks continue. May’s discussions with the opposition will be held with one eye on the rear view mirror as her own backbenchers launch another surge to oust her as Prime Minister. With markets wary of these risks already, the Pound trades relatively level with its close of trade last week.

 

In the US, President Trump’s decision not to renew waivers that allows certain nations to purchase Iranian oil exports has sent crude oil prices higher once again on supply concerns. With growing tension between the nations, Iran has threatened to close the Strait of Hormuz, a strategic body of water linking the Persian Gulf to the Arabian Sea and Indian Ocean. The Japanese Yen enjoyed a bid in early trading this morning as investors scrambled to price in the tumultuous and elongated weekend.

 

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 18th

Rand Resilience

 

South Africa’s Rand is one of the most freely traded emerging market currencies in the world. With limited protectionist monetary architecture against capital in/out flows and with no explicit targeted manipulation of the currency from the central bank, the Rand is subject to the whims of international sentiment.

 

With this in mind, consider the past week or so for the Rand: developments on Trump’s global trade war; IMF warnings of political uncertainty; condemning reports of decline; and a dovish central bank. Enough threats were levied at the exposed currency in the last seven days to make its chart appear more like the musings of a toddler with a green and red crayon as opposed to the market’s considered valuations of sub-Sahara’s largest economy’s tender.

 

Trade War

 

Holding on to a 3% gain against the US Dollar since the beginning of the year, developments on the resolution of Trump’s Sino-US trade war have failed to disrupt the Rand considerably. An environment of strong global growth is imperative for most emerging market economies who themselves are reliant upon international macroeconomic affluence. Stronger economies trade more frequently and openly with each other where profits can be appropriated by countries earlier in their development cycle. Any trade war aims to disrupt this harmony and fluidity to global trade.

 

Threats to the trade war’s resolution in the last week alone include speculation that President Trump may place “too much” power in the hands of the Chinese, at least from the perspective of US industry. The enforcement mechanism, according to Robert Lighthizer, is what’s left to thrash out for the successful resolution or cessation of Trump’s trade war.

 

However, the reciprocal approach to enforcement, according to critics of the arrangement, is leaving a sour taste that Trump might put Xi too close to the driving seat of US commerce. If the public, and strategic sectors, continue to rally behind this belief, it’s not inconceivable that the US President, not an individual known for his patience and inaction, could rip the rug out under the deal. This threat to global trade could have thrown the Rand into a spiral amongst other emerging market currencies, however, the Rand continues to hold its nerve… so far.

 

Warnings

 

The IMF and Jo’burg political-risk advisory, Eunomix, have not flattered South Africa’s political economy in the past few days. Yesterday morning, headlines claiming that the nation’s decline is the “worst among nations not at war” would logically serve as a reminder or revelation that the Rand might not be a good investment for those of a more nervous disposition.

 

Painting pessimistic forecasts for South Africa’s President Cyril Ramaphosa, the report claimed that state capture under his predecessor Jacob Zuma has left the economy in its weakest state since its former President Nelson Mandela held office.

 

Moreover, the report claimed that the populist policies including land expropriation favoured by the incumbent leader of the ANC versus the more orthodox economics adopted under President Thabo Mbeki, Zuma’s predecessor, are deterring the foreign investment required for South Africa’s long term recovery.

 

Yet still no flinch from the Rand which, yesterday, ended the day some quarter of a percent stronger than its opening price. So is it all just priced in – baked into the cake already? Well, having recovered more than 9% against the Pound since a sell-off at the end of last year, and 10% against the Dollar, I would be more inclined to suggest that fear and contagion have been, to a considerable extent, priced out and positioning surrounding the Rand and emerging markets resembles one that should allow a slew of negative headlines to spur a devaluation in the currency.

 

SARB

 

Yesterday, South Africa’s inflation rate was read at 4.5% – bang in the centre of it’s 3-6% target band and convincingly above the previous month’s recording of 4.1%. From the Reserve Bank emerged a rhetoric of “it’s too early to tell”. Particularly due to the external and fuel-price driven inflation recording, the Bank thought it imprudent to consider tightening (or rather not loosening further) monetary policy in response to the inflation result.

 

Denying the market’s justifiable expectations that stronger inflation might allow the nation to raise rates and reward holders of the domestic currency in a move that would be seen as positive for its value, the Rand still didn’t budge from it’s loftier heights.

 

The Rand over the medium-long run remains subdued, no doubt. It’s still a relative bargain compared to the immediate aftermath of the so-called Ramaphosa effect. However, the Rand has displayed remarkable resilience in the face of its most recent attack.

 

 

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 17th

Exchange Rates

 

We have written previously about the low level of exchange rate volatility in the past year and it is now official: exchange rate swings are at a low for the past 5 years. Euro/USD 3 month volatility is running at a third of the norm over the past 18 years. The closely watched benchmark of EUR/USD has traded in a 4 cent range in the past year. GBP/USD is showing the same calm despite the torrid political shenanigans over Brexit and the Conservative party leadership contest which would normally be more than enough to move the market sharply and frequently. USD and GBP both slightly weaker overnight: GBP on no news Brexit and USD on what POTUS is contemplating giving to the Chinese on trade.

 

 

 

996 versus 945: What DOES this mean?

 

Answer: Asia versus the old world typified by France. Jack Ma the founder of Alibaba, the Chinese Ebay espouses working from 9AM to 9PM 6 days a week, hence 996. On the other hand the law in France is a max of 35hrs a week or….9AM to 4PM or…. 945…! Jack Ma is worth $40billion and his company just short of $500billion. Enough said…

 

 

 

As English as….Stonehenge?

 

Or rather not…as it now turns out the most famous ring of stones built in 3000 B.C. was constructed by Neolithic man whose roots are confirmed as being Anatolian (modern day Turkey.) The migrating Anatolians set off in 6000B.C. along the Mediterranean coast and up through Western Europe arriving in Britain in 4000 B.C. After a further 1000 years of gathering wild plants and fishing, the Anatolian Neolithic Brits turned their hands to construction: Stonehenge. SGM-FX’s James is currently stocking up his camper van for the Stonehenge summer solstice on June 21 and is looking forward to the normal modern Druid fare of big cigarettes and rough cider.

Following this Stone Age Stonehenge breaking news…Who’s for a kebab? James?!

 

 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 16th

Great edifices, like great mountains, are the work of centuries:

 

 

I should think many of you reading this brief right now have visited, seen, or at least heard of the Notre Dame Cathedral in Paris. No doubt too that you have spotted the saddening news of the fire that last night caused as-yet unknown damage to Paris’ iconic Notre Dame cathedral. Yesterday evening through to this morning, admirers of the building stood silent, watching flames climb up the Cathedral’s features. Many even screamed as the spire gave way atop of the 12th century building.

 

 

Yesterday evening’s dialogue and indeed this morning’s papers were anticipated to revolve around France, yet not with headlines as emotive and saddening as “Heart in ashes” – La Croix, and “Our lady of tears” – Le Parisien. Yesterday evening, President Macron was supposed to deliver his “first concrete measures” on national television following two months of public consultations under the auspices of the grand national debate.

 

 

Les gilets jaunes, or yellow jackets, have taken to the streets of Paris and many other French cities every weekend so far this year. The movement originally arose in reaction to rising and unaffordable fuel prices but rapidly grew into an embodiment of discontent in Macron’s presidency and France’s per capita economic struggle.

 

 

Ten thousand nationwide debates and two million online responses had informed the President that some 82% of the population wanted to see a tax cut and at 8pm yesterday evening, those participants as well as international markets were waiting to see what the President would come up with. In hindsight perhaps Le Figaro, a Parisien daily newspaper, might still have run with the headline “Le désastre” – The disaster – albeit with a different picture.

 

 

With the fire breaking out around 6:30pm local time, the President announced he would postpone the announcement. Instead, Emmanuel Macron yesterday evening had the chance to pledge to rebuild the cathedral because “that’s what our history deserves, because that is our destiny”. Resilience and defiance in the face of this national disaster in the long run may do little to protect the French president from a hugely dissatisfied electorate.

 

 

The world’s reaction to last night events (bar perhaps that of Trump’s flying water tankers), is testimony enough that we won’t need another Victor Hugo to save the great cathedral unlike last time. Macron, however, might not count on so much sympathy if his reforms go up in flames.

 

 

 

Oil prices snapped their longest winning streak in three years amidst a report of increased US oil rig activity. The slip in crude oil prices hampered Sterling support through the day. Sterling found more solid footing when Foreign Secretary Jeremy Hunt echoed shadow Chancellor McDonnell’s opinion that cross party talks were more constructive than people have thus far given them credit for.

 

 

 

The Rand continues its impressive march forward this year despite warnings of political uncertainty from the IMF.

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 15th

Markets

 

At the start of Easter week markets are looking to the start of Golden Week in Japan this time with a further holiday period with the new Emperor’s accession. The longest continuous closure of the Japan market since WW2 is causing a few frayed nerves. In the UK currency, credit and equity markets are calm as Parliament this week at least is officially off for Easter although the behind the scenes deal making continues unabated. The USD is a bit weaker following Trump’s call for lower interest rates. Asian markets have opened higher on the back of a positive outcome to trade negotiations.

 

 

European Elections 2019

 

As we prepare for an election that we absolutely definitely were not going to participate in at a cost of GBP100 million plus, it’s worth looking back at the chronology and the results of the last European Election on 22 May 2014. It was not until 20 February 2016 that the then PM David Cameron announced the Referendum which took place on 23-06-16 i.e. two years after that last election. Of the 73 British MEP seats in May 2014, the results were as follows: UKIP 24, Labour 20, Conservative 19, Green 3, SNP 2,and 1 each for Lib Dem, Plaid Cymru, Sinn Fein, DUP and UUP. Voting is on the basis of proportional representation but it is worth remembering that at that time UKIP won the most votes at 4.4 million, so that was twice in 2 years that the UK by implication given UKIP’s manifesto, voted to leave Europe. May 2019 will be a hugely significant vote given its irrelevance (assuming the UK does indeed exit the EU) and will encourage the extremes of each of the Leavers and Remainers. Nigel Farage’s Brexit party having been a likely non event will have the chance to now assume a much greater influence.

 

 

It’s complicated: Worth remembering what Europe really does mean…..

 

 

 

 

Lastly…Just in from the South Coast

 

The UK’s only drag wrestler, one Ollie Burness who fights as Priscilla Queen of the Ring in a fetching silver number, made his hometown debut in Portsmouth on Saturday night. SGM-FX Head of Compliance Alex was considering regulatory implications for such entertainment, but sternly directed that team mates Charles and Graham should stick to their golf…..and not even think about wearing their pants outside their tights.

 

 

 

 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 12th

Market

 

As further evidence of a cooling in the global economy surfaced this week, it was inevitable that a scapegoat would be sought. Not only Europe but also the IMF are getting in on the act to blame Brexit. In currency world this week EUR has weakened versus USD and GBP has held up well bolstered by the belief that the UK is better off having an extension to end October for leaving the EU. Stock markets have fluctuated within a narrow range and the main story remains the strength of WTI Oil at $64+.

 

France and the Big Debate

 

Ouf! Le ( Petit) President himself instigated Le Grand Debat in response to the Gillets Jaunes to discover why there was such widespread dissatisfaction in France. 10,134 meetings each attended by an average of 45 people came up with what the people want: firstly, honesty and secondly, lower taxes. 1,932,881 posts were submitted to a website confirming just that. There is a widely held view that all this was to boost Macron’s flagging poll ratings and were just an expensive PR exercise. Mon dieu-surely not?!

 

Brunei Boycott

 

The UK Police Federation have cancelled their annual awards at the London Dorchester and the Conservative Party have also quietly cancelled an event there. As the anti Brunei movement gathers momentum, watch out for offers at Hotel Eden, Rome and Le Meurice in Paris. Escape Brexit and have a bargain weekend away: Win win!

 

 

Eurovision

 

If you have booked your flight to Tel Aviv for 18 May to attend the Eurovision Song Contest, you are in for a treat with Madonna due to sing two numbers. If like the 180 million other viewers who are estimated to watch it on TV you should make sure that your soundbar is in place with the volume cranked up.

 

SGM-FX’s answer to James Corden, Graham can be heard warbling American Life in readiness:

 

I tried to be a boy

 

I tried to be a girl

 

I tried to be a mess

 

I tried to be the best

 

Phew! Shades of Conchita Wurst, Graham?
 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Trick Or Treat?

The British stereotype can be a confusing one. The French call us “Roast beef”, I suppose due to our affinity to the quintessentially British Sunday roast and, one would assume, partially in retaliation to being referred to as frogs. Internationally, are we not also supposed to love a good cup of tea and love a wait around governed by proper good-old queueing etiquette?

 

Well, I don’t. And Theresa May is, I suspect, about to be reminded by her own Conservative Party, those who oppose her in the House of Commons, and the UK electorate, that perhaps the well-tempered, orderly and patient British approach to things is a thing of the past or a figment of the imagination.

 

A European Council summit last night has confirmed markets’ expectations that the United Kingdom will not be forced to honour a deadline for leaving the European Union this Friday. Instead an extension of the Article 50 process of approximately six months has been agreed, with the new deadline of October 31st 2019 – spooky!

 

The offering reflects a win for France’s President Emmanuel Macron, who’s preferences appear to have been most closely reflected in the extension deal, restricting the more lengthy timeframes thought to be on offer by Germany’s Angela Merkel and favoured by the Council president, Donald Tusk.

 

The UK Prime Minister will be back in London today to sell the deal to Parliament. With her authority in the House falling by the day, I’m unsure whether last night’s deal will be something for the party to rally behind to keep her in the top spot. I can imagine Mr Johnson and Mr Gove, front runners in the race for her job, in rather high spirits this morning.

 

So is it bye-bye T-May, T-May goodbye? Perhaps not. One feature of the extension is a review period scheduled for June. This caveat will allow May to convince more Eurosceptic members, who might otherwise suggest she put down the tea cup and hang up her queueing boots, that this isn’t a six month wait around; if they get behind her deal this can be done by Summer.

 

The Pound was unchanged on the news as most market participants had expected a significant delay and had consequently priced out the risk of leaving the bloc tomorrow. May’s argument to achieve the extension in Brussels relied upon needing more time for cross-party talks with the opposition leader, Jeremy Corbyn. 

 

Sterling needs Parliament to swap the cup of tea for a piping hot black coffee and to get on with it. The Pound, that had broken its 2-year long ranges earlier this year on hope of a resolution and progress, looks in serious risk of falling back within this range once again. If it looks like we’re leaving with a no-deal come deadline day and Halloween 2019, foreign apples in the trick-or-treating bag might be welcomed for once!

 

A big day for central banks yesterday with an ECB policy decision and release of the US Federal Reserve’s minutes from its last meeting saw little change in market prices yesterday. A reminder of the dovish tilt to European monetary policy versus a US that is further along its economic cycle mildly reinforced the weak Euro strong Dollar trade evident since mid-2018.

 

 

Discussion and Analysis by Charles Porter

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