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Morning Brief – Friday 31st

China: The Dead Spread

 

When I worked on the floor of the Chicago Futures Market, traders watched and traded the price differential between spot prices of pork meat and the futures price of live hogs. It was less than charmingly named the Dead Spread. Pork as we all know is a fundamental of the Chinese diet and global pork prices are about to receive a major jolt. Six months ago African swine fever was imported into Guangdong province and was slow to spread. It has now grown rapidly and farmers have slaughtered herds of pigs to prevent the spread of the disease. At first we thought this was a local or maybe a regional story, but research has demonstrated that it takes approximately 6 months for such an outbreak to feed through to prices. Spot pork meat prices in China have risen by a relatively minor 10%. But estimates of the 400 million Chinese pig stock being reduced by a third have rattled futures markets on the other side of the world. In Chicago the Sep and Dec 2019 lean hog futures contract have increased by 50%. While readers may think that Chinese will replace this part of their diet with soya or buy overseas pork, the fact is that for the 1.4 billion Chinese there is simply not enough pork in the world to replace the loss of a third of their pigs. For the rest of the world: expect pork prices to rise sharply in the next months, so stock up your freezers now, the Dead Spread is about to narrow big time as spot pork rises towards the futures price.

 

 

Italy

 

The Euro elections have had a number of consequences and nowhere more than in Italy where the right wing League Party led by Deputy PM Salvini captured 34.3% of the vote. This has worried markets as emboldened by the result, Salvini has pledged to concentrate on the real economy and wants to ignore the “old parameters” of the EU budget rules. Salvini has for good measure called for a fiscal shock which means tax cuts and will cost EUR 30-50 billion. The government bond market has been selling off with yields climbing to 2.72% in the 10yr which is a historic high against the German Bund which is trading at minus 0.15%. For such a large and such an indebted economy such as Italy demonstrably to be threatening to ignore EU budgetary rules goes far far beyond the borders of Bella Italia with its implications. Basta!

 

 

China v USA Trade

 

A potential Trump trump by the Chinese lies in the production of Rare Earths. 70%+ of Rare Earths are mined and exported by China and are vital in an array of sectors including the glass industry, renewable energy technology, oil refineries and electronics. The US Geological Survey designated Rare Earths critical to the US economy and to national defence. The Chinese are it is reported contemplating withholding exports to focus the mind of POTUS on the trade negotiations. Bullshit may baffle brains but commercial considerations trump……er…… Trump?!

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 30th

Wide Ranges

 

 

Yesterday was a rough day in markets. Equities continued their tumble with key US indices producing price action that could suggest an imminent market correction. Amidst an intensification of the trade war masqueraded as threats of new Chinese economic weaponry, global bond yields continued to tumble. In a bid for safety, the US Dollar continued to appreciate across the board, making notable gains against both the Euro and the flatlining Pound Sterling. US treasuries now trade at their highest price since late 2017. 

 

Enormous momentum has carried the Pound lower in the past month tumbling from the lofty heights of 1.32 against the US Dollar and 1.18 against the Euro. So, where do we go from here?

 

Sterling Markets believe it or not are certainly still digesting the tumultuous month of May that saw cross party talks between Labour and the Conservative parties breakdown in yet another Brexit frustration. Add on top of that the recent resignation of our Prime Minister and 11 candidates chomping at the bit for her former post and political risks are significant to say the least. 

 

Fundamentals in the UK economy look strong and the economic data releases have, by and large, surprised to the upside. However, given the frequency of released observations I am forced to concede that with the original Brexit deadline in March well within the scope of the most recent data, businesses’ scramble to stockpile in case of a disaster no-deal exit ahead of May’s twilight extension agreement could have skewed the results and made them appear overly optimistic. 

 

Within the GBPEUR and GBPUSD pairs, it’s easy to determine the dominant market expectations. Options markets are a venue to hedge and speculate on price moves between two (or more) assets with a premium representing expectations, differentials and risk. Options markets scrambling to price the value of one Pound versus one Euro or US Dollar make for interesting reading. By and large, the expectation for an appreciation of the Pound against the US Dollar is clear. Bloomberg, a leading financial data provider, collates a survey of economists’ and analysts’ forecasts for the pair. 

 

The consensus suggests the value of one Pound will rise by approximately one US cent per year each year from 2020. There is also an immense jump through 2020 where December is expected to observe a cable price of 1.40 from these forecasts. The jump is to be anticipated as markets expect Brexit to be resolved and most market participants still anticipate an orderly exit. Watch this space for how this expectation will evolve given the leadership contest that is well under way. With 2021 bringing the EU’s renegotiation of it’s fiscal multi annual financial framework and the UK likely to be well and truly banned from this process and simultaneous membership of the block, the immense revaluation of the Pound prices in expectations for an end to the day to day trivialities of Brexit.

 

If you look at the implied volatility in options markets and particularly the 10% outlier observations, the wild case pricing of GBPUSD, we can see that a bullish Sterling case sees GBPUSD end up at 1.72 in five years’ time. However, the doomsday scenario has options pricing implying a scenario in which 1 Pound is worth just 94 US Cents. BRACE!

 

With the political and economic risks engulfing Italy and the rest of the peripheral Eurozone you might expect the call for GBPEUR to be even higher. To those of you reading this and that haven’t fallen into the trap of the previous sentence, well done – GBPEUR forecasts show considerably less consensus displacement than cable.

 

Economists and analysts see GBPEUR remaining largely range bound partly due to the immensely tight interest rate differential between the negative rate environment of the Eurozone and the muted economic activity of the United Kingdom. Add to this the mutual impact of Brexit on both sides of this pair and the fact that the USD seems later cycle than the Eurozone and you achieve a consensus forecast that GBPEUR will remain within the few cents range that we’ve seen since late 2016.

 

Doomsday and heyday scenarios stand at 1.40 within GBPEUR and 0.86 in five years’ time. No, 0.86 is not a reading of EURGBP, a commonly quoted convention in forex, we’re talking if it hits the fan then 1 Pound equals 86 cents. Suddenly a holiday in the UK might seem slightly more appealing if this did materialise. 

 

One thing’s for sure: for a recovery within the Pound and for doomsday scenarios not to be realised, Brexit must be produced in a orderly way that does not upset international order and commerce. 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 29th

UK Passports and US versus Europe

 

This may have passed you by but in case it has not: the UK is a member of the 6 month club which allows nationals of countries such as the UK to visit the USA with only the unexpired time necessary for the trip. Now for Europe: in the event that the UK exits the EU without agreeing a deal, periods of less than SIX months unexpired on a passport will mean that the holder will NOT be permitted to enter the EU. So if like me your passport expires next summer and you plan to enjoy a European visit in the first six months of 2020, you will be unable to do so starting January 1 2020.

So apply early to UKPA and load up your SGM-FX Prepaid Currency Card for a hassle free time.

 

 

 

Pilfering Pistacchios: it’s not just nuts…

 

Our recent account of both strawberry field and grape vineyard heists in Germany have opened the floodgates from our Italian readers who have not been slow in coming forward to let us know that when it comes to top class agricultural rustling, Sicily leads the way. The most highly prized pistachio in the world is the pistacchio verde di Bronte where 7400 acres on the slopes of active volcano Mount Etna produce 1% of the global production each odd numbered year i.e. 2019. So what? I hear you ask. Well: Sicily’s green gold as the pistachio verde are known, are worth more than twice the amount of the two largest producers the USA and Iran. Sicily’s green gold nut fest attracts the attention of well organised thieves and has Inspector Montalbano’s colleagues scratching their heads. The solution for 2019 are helicopter carabinieri patrols to supplement Bronte’s finest monitoring the plethora of roads around Mount Etna in their Fiats.

 

 

 

How to lose a EUR 45M 43.5 carat Diamond: Unlikely story of the week.

 

Step One: take it with you to the excellent Hotel Warwick in Rue de Berri, Paris and hand it to two Russians claiming to be jewellery experts. Step Two: Take it back from the “experts” in a closed case without checking it. Marie-Madeleine Dioubate of Guinea then phoned the gendarmes and explained that when she opened the case, she discovered that the gem had been replaced with an imitation. Inspector Clouseau on the case. An early result not anticipated.

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 28th

One May too many:

 

Surviving a third May proved to be too much for the British Prime Minister who, on Friday, announced her resignation in front of 10 Downing Street. Following a meeting with the chairman of the 1922 committee, she was left with no choice but to announce her defeat to the nation. Chosen as leader of the Conservative party following the resignation of former Prime Minister David Cameron, Theresa May served one of the shortest and most divisive terms in office. In fact, at the time of her resignation she stood shy of Gordon Brown’s 2 years and 219 days in office. Perhaps a departure date of 7th June was a concession offered by Sir Graham Brady in order to survive in office longer than the ill fated premiership of former Labour Chancellor!

 

Even with her departure date set in stone and despite a smattering of newsworthy events over the weekend, not least the European Parliamentary Election results, Theresa May is still receiving headlines as a controversial leader. There appeared to be a warm reaction to May’s tearful departure, with the public reflecting upon the tough time she had spent in office and the near-impossible task that lay before her in 2016. However, as the dust has settled, this sympathy hasn’t stuck.

 

May’s involvement of her cabinet often left few supporters fighting her corner. Alongside David Cameron, and presumably her successor, she will go down as one of the Brexit Prime Ministers. With this in mind, it is mesmerising to thing that it took 18 months for her original cabinet to be consulted on the government’s Brexit plan, despite red lines being drawn unilaterally across one another left, right and centre. Even the Democratic Unionist Part, the Northern Irish party propping up the Conservative minority government, was consulted but not included in the debate.

 

Much as when Theresa May faced calls for resignation, votes of no confidence from her own back bench and from across the isle, there are few officials singing her praises today. With nine leadership bids cast in the ring (Gove, BoJo, Raab, Hunt, Leadsom, Stewart, McVey, Hancock, Javid) and several more hopefuls twitching in the wings, the Pound will watch closely who will take over the position and the consequent most likely course of Brexit.

 

The EU election results are in and seismic shifts through the Union are apparent. The most radical changes since the last election in 2014 have come from Denmark and the United Kingdom albeit in diametrically opposed directions. In Denmark, PM Lars Lokke Rasmussen of the centre-right Liberal Party, consolidated a large majority in the elections. To the surprise of markets who were eyeing a shaky national election on June 5th, the anti-immigration Danish People’s Party lost more than 50% of its electorate at the polls in a political return to more traditional polling.

 

Amongst the UK electorate, on the other hand, the consolidation of separatist political movements was apparent, with Nigel Farage’s Brexit Party securing an impressive majority within the polls. The move is hardly surprising. Farage’s 6 week old party encompasses the entire package of values that UKIP espoused in 2014: let’s get out of Europe and then we’ll see. With his party securing 27% of the vote in 2014, it is unsurprising the former UKIP leader’s party secured almost a third of British ballots for his new party following 5 years of political frustration for the near four million people that voted last time around.

 

The major losses were to the UK’s heavyweight political parties: the Conservative and Labour parties. With the resignation of the Prime Minister on the same day as the British ballot, a shocking performance for the Tories is to be anticipated. As the vote count stands so far, the governing party is looking at losing nearly 15% of the vote versus half a decade earlier. Capitalising on traditional parties’ lack of vote share was the Liberal Democrats, almost tripling their vote share this weekend. The picture is clear; the nation remains as divided over a single-policy issues as the 52:48 divide told us three years ago. Jeremy Corbyn, Labour leader, in response to this lesson has suggested this weekend that any Brexit deal should be accompanied by a second referendum. Will the next Conservative leader and Prime Minister take a similarly unequivocal stance on Brexit? Unless they want to become the third Brexit Prime Minister, and certainly not last, they’d want to think carefully about it.

 

After a hellish May, the Pound continues its decline, digesting the European elections with little optimism. As UK politics stands directionless with no obvious leader, the Pound will struggle to find a confident bid.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 24th

Elections:

 

 

India

 

PM Narendra Modi has been returned for a further 5 years with a resounding vote of confidence in his party the BJP. 600 million of the 900 million eligible votes have been counted and it points to 300 of the 543 seats going to the BJP. The Opposition Congress Party led by Rahul Ghandi have lost ground with the BJP actually increasing its majority. The Rupee has held up well against the USD on the day given the prevailing USD strength against all Emerging Market currencies.

 

 

UK/European

 

In case you are wondering, a news black out on exit polls and no counting in the UK until the last vote in the last country of the EU has been cast on Sunday evening. So no need to comment further as the UK and to an extent the EU awaits the expected news from Downing Street of the timetable to elect a new Conservative Leader and therefore a PM. And this is the conclusion that the currency markets have reached: GBP static having lost 3% of its value in the past two weeks; so until there is news watch and wait. Once the announcement is made, expect a dip but it is largely discounted.

 

 

Crime Busters

 

The boys in blue (ok this one’s from Germany) so the boys in green were after thieves following a major heist in Germany’s Rheinland Palatinate of an entire field of strawberries valued at EUR 700 currently GBP 620 or USD 780 (sounds low). The police say they are hopeful of catching them since it was quite a decent sized field and would have taken a number of thieves/pickers and several vehicles. So a completely different situation to those thieves then from the same state who managed to steal a whole vineyard of grapes last year and who remain at large….
Hic or maybe Hock!

 

 

Eurovision Latest – try and contain yourselves

 

(Over) excitement when SGM-FX bopper Euan discovered there was to be a re-mark of the U.K. entry’s score. The U.K.’s dismal 16 pointer was in fact too high. Now re-marked the U.K. is commandingly in last place with 13 points. Speedos, spangles and angel wings back in the box then- Euan (crushed) now looking forward to next year in Amsterdam. Deep sigh.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 23rd

AUDJPY

 

From the title you might think well, I don’t trade Aussie Dollars, come to think of it I’ve never been there in my life. Similarly, I’ve never had a Japanese Yen to my name, why on earth would I consider the exchange rate between the currencies of these two countries that are at least eight hours away from my time zone?! Well, the answer is because the golden compass of the AUDJPY exchange rate can help you make some serious decisions on your GBP, EUR and USD, and come to think of it most accumulations of foreign currencies.

 

In the investing world, these two currencies are the antithesis of each other; matter and anti-matter. With Australia’s Dollar a “high-beta” currency, moving dramatically on sentiment and external conditions, the Japanese Yen is one of the world’s most famous safe havens: a harbour investors seek cover within during a storm. When matter meets antimatter the two cease to exist in a fleeting moment, emitting energy usually in the form of radiation. Fortunately, we don’t need particle physics to explain what happens when the Aussie meets the Yen.

 

One Aussie Dollar is currently worth just shy of 76 Japanese Yen, equalling the lows of the beginning of 2019, a level hit following one of the worst stock market sell offs at the end of 2018. As risk settled and trade optimism continued, the Japanese Yen’s astronomic appreciation eased and the Aussie Dollar managed to gain traction creating a technical price floor around this level. To add to the pressure, 76 is also the level that the pair threatened in January 2016 before staging a similar recovery.

 

The trade links between Australia and China are critical to both economies. China imports huge quantities of Iron Ore, for example, from the commodity focused nation. Intensifications of the trade war that threaten Chinese production and growth therefore weigh heavily on the Aussie Dollar as expectations grow of lower future Australian exports. Combine this specific risk with the status of the Yen as a safe haven and it’s particle physics on a global scale.

 

Sub-76 Yen to the Dollar is a pivotal level that at least thanks to the surprise election result over the weekend down-under, has not been convincingly broken yet. If the pair’s bearish trend continues it will flash warning signals to the rest of the world with huge ramifications on global assets.

 

Citigroup Inc., Oanda Asia Pacific Pte and JPMorgan Asset Management representatives have all strongly suggested the pair will break this level spurring concerns in wider markets. Options markets too are pricing the strongest polarised expectations amongst G10 currencies, with the Yen priced as the G-10 currency most likely to appreciate in value, and AUD the currency most likely to sell off.

 

So if these major market participants are right, which they really could be, and options markets are onto something, then there’ll definitely be some spare cash to stick another shrimp on the barbie if you find yourself kicking around Sydney!

 

However, what for the rest of the world?

 

The pair is a barometer of economic health and its deterioration would cause stock sell offs in a bid for safe havens. In Foreign Exchange markets, the Pound has achieved a more risky status as a result of its political tumult surrounding the Brexit saga. It has also proved sensitive to risk appetite changing as a result of trade war developments. So expect a weaker Pound (all other things on the Brexit/economic front being equal) should AUDJPY break below its present market value. The US Dollar has struggled as a safe haven as of late late, however, with its status as the underwriter of international trade it is unlikely to be moved immensely. US treasuries now trade a long way away from their >3% yield enjoyed at the start of 2019 on the 10-year note. A further rally in US debt, a classic safe haven, would limit reward behind USD thereby stunting investor demand for it introducing a downward pressure on the currency.

 

The Euro, much to many commentators’ surprise, is showing itself as an emerging safe haven. However, unabating political risk and economic stagnation is hindering its ability to achieve a bid as a result of intensifications in global risks. Conversely, if the 76 level is held, a signal of confidence in the global economy and trade war would be generated, raising the Pound, whilst undermining defensive asset demand.

 

Don’t own a Yen; don’t need a Dollar, Dollar, Dollar isn’t what you need? Well, there’s your reason to watch BOTH. (Hey, hey.)

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 22nd

PM May’s Gamble

 

GBP liked the idea of a second Referendum rumoured to be what PM May would announce yesterday afternoon. The actuality sent GBP lower. FTSE steady at 7328. Rather than give credence to the market rumour, PM May painted a picture with multiple and in many cases contradictory possible outcomes of not backing her deal which goes to the UK parliament in the first week of June that included the rumoured Second Referendum, a General election, a NoDeal Brexit and the withdrawal of Article 50. In response her Tory colleagues are mulling a Vote of No Confidence which we suspect is more to do with her pandying to the Labour Party in her speech yesterday.

 

 

Fintech: Peak? Bubble? Consolidation?

 

A wave of investment has been made in this sector and while valuations have in many cases soared, companies have not demonstrated net profits but instead racked up sizeable losses. Monzo, Revolut and Transferwise all fall into this category. All I should make clear are also competitors of SGM-FX. But that is where the similarity both begins and ends since their business models are targeted to appeal to a mostly young client base eager to take their products and services and then once the “land grab” is taking place, to raise further tranches of capital at increasingly inflated valuations. Assuming that investors continue to “feel the joy”, this can continue….…for a time, but just as Metro Bank has found out, once investors ask the questions as to when these companies will in fact make money and how they will realize their investments, cracks begin to appear in that business model. It will be interesting to see what proportion of their clients these companies not only “excite” but more importantly retain after the current part of the cycle comes to an end.

 

 

One thing (at least) that cannot be blamed on Brexit

 

Tomorrow Thursday is the day that the Prospect Union has decided to flex their muscles and as a result 6 Scottish Highlands airports will be closed. Never mind UK inflation ticking along at about 2%, the air traffic controllers are demanding 10%. So no flights, hotels cancelled and unquantifiable loss to the Scottish tourist industry of visitors scrapping their plans for the long weekend. Still, when and if Scotland secedes from the Union they can award themselves above inflation pay rises as they like over tea and shortbread with Nicola Sturgeon!

 

 

Spanish Sexism on the Squash court

 

Hard (no pun) on the heels of news that cash strapped Brits are re-thinking their Spanish holidays due to GBP lurching downwards in the past couple of weeks, is one of the more unlikely prizes for the winner of a ladies squash tournament in Spain’s Club Oviedo in the Asturias: Winner Elisabet Sado was awarded a trophy and a vibrator( not a typo). (Small) ball player and Spanish enthusiast Charles has hastily replaced his racquet in its cover here on the desk at SGM-FX and has looked to Alberto on our Compliance desk for guidance. “Wrong on every level and definitely a misplaced case of KYC”, opined Alberto. Olé

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Mornign Brief – Tuesday 21st

The Perfect Storm?

 

You would be forgiven for believing that the South African general election was the most significant threat to the Rand in the first half of this year. However, eschewed of blame as you might be, you’d still be wrong. In fact, the week ahead is considerably more risky. Tomorrow, the National Assembly will sit for the first time since South Africans headed to the polls two weeks ago.

 

 

At this event, the elected leader of the African National Congress, Cyril Ramaphosa will be inaugurated with the subsequent 48 hours likely to elucidate the leader’s cabinet appointments. So far investors have looked positively upon the outcome of this month’s elections, with the Rand outperforming the currencies of its emerging market peers. The relative appreciation in the Rand following the result has been thanks largely to an out-performance in the election versus the indicative polls that preceded it, creating the impression that the President will find it easier to implement the reforms that he has promised and regenerate an ailing, indebted economy.

 

 

However, the consolidation of this electoral result will determine the market’s impression of the election result and set the medium-long term path for the Rand. Clouds remain over many of the ANC’s senior members and the threat of their reappointment to government is undermining investor confidence in the economy, thereby devaluing its currency and debt. The most obvious way for the President to consolidate progress is to remove superfluous ministerial portfolios and streamline his cabinet. This would afford the opportunity to have a tighter and fresher governmental core to steer South Africa to stronger growth.

 

 

As if the cabinet appointments weren’t risky enough, the world will also see how the South African economy performed last month. The domestic inflation rate will be read tomorrow with the South African Reserve Bank deciding upon its target rate of interest on Thursday. Meanwhile, the trial of former president Jacob Zuma will continue throughout the week as yet another reminder of the corruption that has plagued South African politics. Serious political and economic risks therefore surround the Rand this week with conditions threatening to combine into the perfect storm.

 

 

The trade war and its ramifications upon global growth will undoubtedly weigh upon the wider basket of emerging market currencies. However, the relative performance of the Rand within this basket will undoubtedly be determined by the actions initiated this week.

 

 

In the United Kingdom today, Theresa May will outline exactly what the 4th leg of voting on her Brexit deal will entail. At the moment, the market, media and public alike are all wholly sceptical of her capacity to push the deal through the divided and frustrated parliament. However, with Sterling dragging its feet at two month lows, parliamentarians’ reactions today to the vote proposal will be important.

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 20th

Big Week

 

Not just with the European elections on Thursday but in Australia where the Liberal Coalition won a surprise victory at the weekend boosting AUD but in the context of a near 3 year low, in Germany where Angela Merkel is being pressured to stand down at the end of this week by her successor Annegret Kramer-Karrenbauer, in Austria where the right wing Vice Chancellor Heinz-Christian-Strache was forced to resign following a honey trap and here in the UK….well two contests: the Euro elections which are dividing voters largely between Remainers polarising towards the Lib Dems and Leavers to the Brexit Party. Then the new leader of the Conservatives and thus the PM which has seen Boris Johnson open an early and maybe commanding lead. Currency markets and GBP remain singularly unimpressed as a NoDeal Brexit has re-emerged as a strong possibility. FTSE sanguine at 7348.

 

 

Saudi Arabia and Oil Supplies

 

In the past few days reports have been coming in regarding a focused effort to disrupt oil supplies. Four oil tankers have been sabotaged which while serious pales into insignificance beside a further report that a key Saudi oil pipeline has been targeted by missile bearing drones from Yemen. The destruction of that pipeline would have an immediate and substantial effect on the price of oil. Suspicion is directed towards Iran for this. If these attacks develop further expect a spike in oil and the price we all pay for fuel very quickly,

 

 

….Not as it turned out

 

Fresh from watching his team giant killers Charlton Athletic beat Doncaster Rovers in League One on Friday night, SGM-FX’s Euan was in front of his widescreen with his pals to throw some shapes and generally twinkle around in support of the UK’s Eurovision entry on Saturday night. Not nul but a miserable 16 points as it turned out and also few points for Madonna. Ah well….material girl………… a million bucks but no melody.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 17th

I.M.Pei

 

News of the death of I.M.Pei the inspirational architect at the age of 102 late last night. At this time of US Sino stresses it is worth looking at the simply staggering array of work produced by Pei the son of a bank manager born in Canton(Guangzhou) China and who arrived in the USA where he was educated at Harvard and MIT before building his iconic career. A true collaboration.

 

 

Italy and the impact on EUR

 

As highlighted last month the 2018 Italian debt position is 132% of GDP which is due to rise to 133% this year and 135% next. This is in contravention of EU rules that insist that such a deficit must be reduced but Italy is going in the opposite direction. 10 year Italian Government Bonds now yield 2.75% versus that of Germany’s which yield….Minus 0.7%. Deputy PM Salvini has indicated that Italy  is ready to break those rules which calls into question the EU financial rules structure and hence the value of EUR. Markets have sold EUR while they watch the Italian government and the EU closely as to how they deal with this.

 

 

Saudi Arabia and the Oil Price

 

In the past 8 years the oil price has halved to $60 and this has resulted in Saudi Arabia borrowing $10billion in 2016 to meet their budget gap and reducing supply to even maintain the oil price even at this level. Last week we wrote that there is the prospect of a $15 oil price due to huge advances in the production of shale oil combined with a reduction in demand. Growth in the Kingdom is still at 2% but contrast that with the healthy 9% that the aspirational and growing and young population had become accustomed to. A new (huge) revenue source is required and quickly. The size of the Saudi economy makes the rest of the Gulf economies a relative side show so expect that region to feature heavily in the news in the next five years-and not in a good way.

 

 

Monet and Les Meules-Giant Haystacks

 

In 1986 it would have taken a brave heart to have written a cheque for $2.53 million for this painting. In 8 minutes and with a reserve price of $55 million, that savvy investment from the heart paid off with someone this week paying $110 million for this depiction of a stack of harvested wheat. In the 33 years that the previous owner of the painting enjoyed the painting-assuming it was not stored in a vault-as a US resident it might have been a matter of supreme indifference to them that at one time that $110 million was worth GBP 92 million and at another GBP 52 million. Quite a swing. For the rest of us 25 quid at myartprints.co.uk will buy you a nice poster of a similar looking Monet haystack!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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