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Morning Brief – Wednesday 31st

US-China Trade Talks

 

For the first time in over 3 months the two sides reconvened yesterday for the oldest reason in the world: self-interest. Make no mistake these trade disagreements are costing real money to both sides: Huawei is hurting following the US banning American firms from using their technology; US agriculture is hurting due to Chinese import tariffs and lastly…both sides are hurting as the trade dispute is weighing on global confidence and growth. No better reason to find a way through all this for both sides: money.

 

 

Gold Silver ratio and the (very) long view

 

We last wrote about this three weeks ago when the gold to silver ratio was 92 times and we expressed doubt about how much higher it could go. It is now back to 86 times and the gold price is firm while good news for the silver bulls among you is that silver has risen a whole dollar to $16. Spare a thought for 70 year old Robert Vesmerais who has spent the last 22 years prospecting for silver and dreaming of a big strike as the sole inhabitant of a Californian ghost town named Cerro Gordo or Fat Hill in Spanish and he claims(no pun) to have found a wheelbarrow full of silver in that time. Frankly he would have been better off sticking to his previous career as a school teacher. Still there is at least no light pollution and plenty of tumbleweed.

 

 

Polish Pull

 

No this is not what the young guns at sgm-fx go on on a Thursday night, it’s what PM Mateusz Morawiecki is doing about arresting the flight of Poland’s youth overseas: at a stroke he has announced the removal of the 18% income tax for anyone under 26 earning less than the Zloty equivalent of EUR 20K which is a decent incentive as the average wage in Poland is EUR 14K.

 

 

Ear Ear-WHAT? Silly Season Story

 

No this is not a tale about deafness. Trying to type this with a straight face- apparently tickling the ear with a small electric current can help the over 55s age more healthily and therefore more slowly. The vagus nerve is connected to the heart, lungs and gut which means that tickling it will improve body, sleep and mood according to a research team at the University of Leeds. The vagus nerve is also known as the wandering nerve because it is long and well connected and “it transmits information from the brain to organs around the body.”

We are trying to find one of these nerves for SGM-FX’s James on Amazon (they seem to have everything) as it will surely connect him to the rest of us! WHAT?!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 30th

Submerged Sterling

 

All hell was breaking loose in financial markets yesterday whilst Johnson was visiting a submarine in Scotland. Photographed inside the control room, a stern-faced Boris couldn’t have done much more to develop the perception of his war-cabinet and his hard nosed government. Okay, perhaps firing one of the missiles at Brussels to show he meant business would’ve surpassed the photographs and, come to think of it, been a classically self-defeatist Borisovian move – perhaps another time!

 

Whilst Boris played battleships his spokeswoman, Alison Donnelly, reinforced the concern of a no deal that has plagued financial markets since his appointment first seemed imminent. She confirmed the Prime Minister’s belief that meeting with his European counterparts and members of European institutions was futile until such point as they signalled a willingness to renegotiate the deal that Theresa May had secured. Given explicit warnings from European leaders and negotiating representatives that no such thing is possible, Sterling traders and investors continued to exit the Pound in anticipation of a hard break from the Union driving its value through the floor.

 

Game Theory came into play today in financial decision making akin to a simple game of chicken: two cars drive down the road towards each other – pull away whilst your opponent remains steadfast and you lose; both steer away and you’re both humiliated but at least alive; crash and you’re both hard as nails but dead. Now studying economics will teach you there’s a way to win this game: to credibly convince the other that your hands are tied: you’ve no choice but to continue straight no matter their actions. Boris’ handcuffs will be his cabinet and whilst a pack of Brexiteers (the formal collective pronoun for such a bunch I’m sure!?) might be met with criticism by some I think it’s damn brilliant as a strategy. “My Hands are tied Mr Barnier; Mr Juncker; Mrs Merkel; Mr Macron” (yeah you get the idea), “my government would never let me back down”.

 

Sadly the EU has its own handcuffs. 27 people representing nearly half a billion people stand behind a negotiator with a mandate to speak for them. Show me a tighter constraint, I challenge you! Now what happens in our game of chicken contenders if both are credibly constrained? A big fireball that, in this case, involves the UK crashing out of the EU on 31st October without a deal pursuing a scenario which many analysts believe could spell GBPUSD, let alone GBPEUR, parity.

 

With 93 days left until the incumbent legal Brexit deadline, you can understand why few investors want to be long Sterling given the risks surrounding its political and economic outlook. Today, for the first time, the implied volatility demonstrated by options markets for 31st October resembles how it looked surrounding 29th March. Markets are starting to believe Boris’ car is going straight on then, but will the EU share that opinion and deviate? Let’s hope so and, with summer holidays in full swing, let’s hope soon! Silver lining: CFTC data on Friday confirmed that net positions betting on Sterling’s decline had grown in number and volume increasing the possibility that a shift in sentiment could force a sudden liquidation and violent upward spike in the value of the Pound. If the EU flinches, we could see just that.
 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 29th

Federal Reserve

 

With the Fed meeting on Tuesday and Wednesday, the expectation given Governor Jerome Powell’s recent comments , is that the Fed will cut the discount rate by 25 basis points. The thinking goes that the priority is to stimulate the economy and that inflation is at such a low level that this is feasible. Expect a few days of huge attention to this symbolic interest rate benchmark. Meanwhile USD remains firm-why? Lower rates will stimulate the economy which will lead to a firmer USD.

 

 

Hong Kong

 

This weekend marked the 8th consecutive weekend of demonstrations in Hong Kong and judging by the comments made by the demonstrators interviewed-assuming they were representative-opinions are more rather than less entrenched. It would be easy to pass all this off as something remote in the New Territories and far from the Central Business District, except…it’s not…. it’s right there in Central. The Police are now admitting that they are struggling to contain the violence which most unfortunately leaves the military solution as being the next one. This is an increasingly volatile situation and as Hong Kong is one of the world’s foremost financial centres, if that does happen, expect a very significant reaction from emerging markets.

 

 

South Korea and Japan

 

It’s not just a trade dispute that divides these two countries but the ownership of 46 acres of rocks sticking out of the sea and comprising 2 main islets and a further 88 small outcrops that has been rumbling on for 300 years. South Korea calls them Dokdo Ri and Japan calls them Takeshima but they are often known as the Liancourt Islands named after a French whaling ship wrecked there in 1849. So what’s it all about? Fishing grounds yes and….energy in the shape of likely large deposits of natural gas.

 

 

Silly Season….

 

Eagerly anticipated by readers of the SGM-FX Daily is the opening of the Silly Season for improbable news stories which officially kicks off today as the last Monday in July. This time the story concerns the use of electricity as the men in white coats and clipboards have announced that opening fridge doors consumes 1% of all electricity usage. 

The plea has of course swiftly been issued by the Environmentalist Mafia(EM) for us all to keep our fridge doors firmly closed. Brilliant. 

How on earth is SGM-FX’s Charles M Porter to get at his chilled Whispering Angel Provençal Rose which is of course THE 2019 summer drink?! Maybe a long straw Charles?!

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 26th

Europe

 

With the Purchasing Managers Index for Manufacturing on a 79 month low, despite heroic efforts by ECB Governor Mario Draghi to inject vim and vigour into the EU economies, the legacy for incoming Christine Lagarde is not great to say the least: Germany and France seeing economic activity weakening, growth across the Eurozone slowing further, job creation stalling etc etc. So Super Mario needed to play a blinder yesterday. Whether he did or not is as yet unclear, but he left rates unchanged. EUR remained in the middle of its range for the day.

 

 

UK Commercial Property Investment

 

Q2 at £9.1Billion is the second weakest quarter in the past 7 years. Lots of blame on Brexit (of course) but investment in this sector overseas buyers has fallen 39% from Q1. Meanwhile the crane count across London and the South East is at an all time high which suggests that while demand for residential remains strong, supply in the commercial sector will exceed demand for the time being at least, so watch out for a slow down in both activity and prices for commercial property. Lots of supply in office space to reportedly fulfil demand-for the time being.

 

 

Hong Kong

 

Unusually, China has gone public and confirmed that they can and will if necessary supplement the 6000 permanent PLA force in Hong Kong with many more troops if disturbances and defacing of Chinese assets in the Special Administrative Region continue. As headlined earlier in the week, this is not to be taken lightly and even less so now that China has issued this statement.

 

 

Even more unusually…

 

While listening to the excellent Soma FM Left Coast 70s Radio on TunedIn at an early hour this morning ( laid back 70s West Coast Rock), I reflected that it was unusual to be able to agree wholeheartedly with President Emmanuel Macron, but his opposition to the jingoism regarding Iran and his disagreement with military action in the Gulf is spot on.

We have to hope that masterly inaction in Europe prevails and that when POTUS calls, he gets the same as the 1976 song Telephone Line by the Electric Light Orchestra:

 

Okay so no-one’s answering

Well, can’t you just let it ring a little longer

Longer, longer oh, I’ll just sit tight

Through shadows of the night

Let it ring forever more, oh

 

Agreed that it’s hardly poetry and has not lasted well, but you get the drift.
 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 25th

Give away day!

 

Get ya free money; get ya free money. It’s ECB decision day and with a 10 basis point cut already priced into markets, pressure is on the ECB either to take policy action immediately or set the path towards a September rate cut. Just one week ahead of the Federal Reserve in the United States, the European monetary authority will be seen as a qualification of whether global equity, bond, and foreign exchange markets have been correct this year in pricing in a looser global monetary policy.

 

European interest rates right now see the main refinancing rate at 0% and the Deposit facility at -0.4%. Great, what does that mean? Well, if a bank has to take out cash from the central bank for a duration of one week it has to pay an interest rate of 0%: it pays back what it borrowed one week earlier. If a bank has too much cash it doesn’t want to hold onto it can give it to the central bank at an interest rate of -0.4%. Yep, it gets back less money following the repayment of the deposit to the central bank than it initially put in! You’ll probably notice two things from these numbers: 1) yes the central banking authority makes money on this quasi-market making activity! And 2) yes, a cut in rates means that any bank can make money simply by borrowing it from the central bank..! Rest assured that a cut in the main refinancing rate is unlikely to trickle down to consumers and businesses: banks are highly unlikely to pay people to borrow money from it! 

 

Now the economic problem with negative rates is twofold. The immediate issue is a moral dilemma: why would banks lend to consumers and businesses and take the risk of non-repayment when it can just borrow money from an institution with infinitely deep pockets and make money that way? Well, the concern is it probably wouldn’t, so, even though money should get even cheaper and by consequence access to money and finance even wider, it can have the opposite effect. You can lead a horse to water but you can’t make it drink; you can lead a bank to cheap money but you can’t make it lend. 

 

The second issue relates to bubbles. The world already has an outstanding debt pile of $250tn. Sure, that’s just a big number so what does it mean? Well it’s equal to just over $34k a person and aggregated it’s 320% of global output per year – the world owes itself 3.2 times what it produces in a single year. To level debt to zero the world would have to produce everything that it did last year 3.2 times without a single drop of consumption or investment by a single entity; how do you solve a problem like Maria(o) Draghi?! I haven’t got a clue but probably not with Christine Lagarde, who waits on the benches for his position. 

 

Cheap money risks creating bubbles which in turn can create huge issues. Sure it’s not the most popular argument but one that the Federal Reserve Chairman Jay Powell himself favours runs a little something like this: bubbles cause recessions. The 2000 recession he believes was a market and consumer reaction to the tech bubble; the 2007/8 recession a reaction to a house price bubble. Cutting rates so low risks perpetuating the existence of unproductive businesses which should be strangled by the natural selection of capitalism. So we end up with overvalued rubbish in markets that are themselves then a bubble. Weaker monetary policy that could either come as a result of today’s decision or the path determined by today’s announcement could therefore create and worsen the next European/Eurozone recession. 

 

Should foreign exchange markets care today? Absolutely. When the European Sovereign Debt Crisis arose in 2010 (read bubble here) the talk was of contagion and secession: Greece was talking about getting out, Italy’s membership commitment wobbled, and Spain was fed up of the whole thing so the Euro suffered. Creating an even harder recession will bring these thoughts back and then it’s bye bye Euro. But this time, unlike in 2010, rates are already zero, money is already free and the balance sheet of the ECB as a result of its quantitative easing program is already around €2tn (6 grand a head for Eurozone citizens). This time, if a recession strikes, we can’t just do whatever it takes all over again, we’ve done that. It’ll be bondmageddon, frankly with the social, economic and political problems it could create it’ll be Armageddon. So, a willingness to go for negative rates should and will be read as a weaker Euro today.
 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 24th

Brexit

 

Selected by the Conservative Party to deliver Brexit it is now down to Boris to put the Boris factor into Brexit- and deliver. GBP unchanged pro tem and the wider market watching this morning for his cabinet appointments which will be the first signs of intent-and ability.

 

 

Gold and Star market

 

Gold at $1426 a 6 year high on the back of low and lower still to come USD rates plus global tensions especially in the Gulf. The new Shanghai tech focused Star market is roaring on as investors rush to get in on the latest Chinese rage. Like all rockets, the tendency is to fall back to earth…see below.

 

 

India comes of (space) age

 

If anyone had any doubts about India joining the elite group of globally leading nations, the expenditure of $140M on an unmanned rocket named Chandrayaan 2 should dispel those. The mission is to land a vehicle on the moon and reach the as yet unexplored South Pole. It is 11 years since Chandrayaan 1 set off and all being well it will be champagne and chapatis all round in early September when the latest symbol of India’s virility and muscle gently settles on the surface of the moon. To avoid disappointment, train your telescopes to see a (virtual) Manish on the Moon!

 

 

Cesar Pelli

 

So farewell to one of the world’s great modern architects on Friday. From London’s Canary Wharf to One Park West in Liverpool to the Petronas Towers in Kuala Lumpur, the US embassy in Tokyo and many many more iconic buildings, the distinguished Argentinian architect left his stamp across the globe. A true world visionary who built a global practice. Hats off to CP!

 

 

Iran and Currency Markets

 

Considered first class letter in the Financial Times from UK retired General Jonathan Shaw who remains one of our brightest and most cerebral military intelligence assets: seek diplomatic solutions rather than military confrontation and avoid getting sucked into US belligerence. It has to be said that markets have NOT priced in an escalation in the very serious situation between Iran and the West.

 

 

 

 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 23rd

The Trichotomy

 

Having outgrown my degree in Political Economy, I thought I’d rescinded all ties to the so-called trichotomy. For those of you that don’t know, political economists are bloody obsessed with the phenomena, reducing the world into a series of three possibilities where only two can be simultaneously achieved at the expense of the third. As much as it pains me, that’s what we’ve got today:

 

 

Boris’ Trichotomy

 

 

 

Now we know Boris is no stranger to negotiating between three seemingly irresolvable stakeholders. Yes, in the interest of full disclosure, that’s a blatant reference to his habit of adultery. But let’s look at how he can perhaps cheat politically:

 

The figure above tells us that if Boris keeps his promise of leaving on the present legal deadline – Halloween this year – then he must forego either: a deal (in which case he needs to go for a no-deal Brexit and a hard border between Northern and the Republic of Ireland) or; Boris must sack the ‘no Irish backstop promise thereby de facto promoting May’s deal.

 

If Boris wants to keep his promise of a deal, he must give up the 31st deadline and go back to the drawing board or he must, again, go back to May’s deal. OR! If Boris cares most about the Irish conundrum and his promise to avoid the backstop, he must forego either the self-imposed deadline or any deal. In that case he either achieves, again, a serious delay or a no deal Brexit.

 

Much as Boris, his first wife Allegra, and affair No. 1, Marina Wheeler, couldn’t all three coexist at the same time, so too the likely-soon-to-be PM won’t be able to mix the three commitments in blue listed above together. As today and the discovery of the UK’s next PM drew closer, the discount within the Pound grew. Yesterday, risk reversals continued to show the number of people betting on the Pound’s demise versus those betting on its fortune was growing ever more in favour of the doomsayers. What’s more is that implied volatility following the weekend climbed towards its highs when observed over the 31st October-1st November period. This shows that markets feel he’s likely to stick to his deadline commitment above all else. If this is true, the Johnson trilemma tells us he must either give up leaving with a deal or accept the backstop: not an easy choice or one that Sterling could enjoy regardless of the decision.

 

Those affected by the value of the Pound must look towards Johnson’s cabinet appointments in the coming days alongside any commitment to any of the three commitments in the blue boxes above. The consequent outcomes: May’s deal; an extension; or a no-deal will command different reactions from markets and early postings in the Johnson government will be crucial to getting a head start. 

 

 

 

 

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

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St Mary Axe view

Morning Brief – Monday 22nd

UK New Conservative Leader and New PM

 

This is the week that represents the long awaited denouement of the leadership contest. Disingenuously Philip Hammond has said he will quit if/when Johnson wins. Somewhat cynical as it is no secret that he will be released in any case as Johnson has almost certainly traded the post of Chancellor in return for support from his chosen candidate who is likely to be Matt Hancock or Sajid Javid. GBP slightly weaker over the weekend as expected on the uncertainty factor and a stronger USD.

 

 

Hong Kong

 

Further disturbances with many thousands of marchers quelled with tear gas late yesterday: this situation is not going away given the unpopularity of the extradition bill- this is the 6th straight week of demonstrations. Carrie Lam has offered to stand down but China has instructed her to remain in post and sort it out. Easier said than done. Companies and individuals with Hong Kong business need to keep a close watch as the danger remains that China loses patience and sends in troops. That will be bad for business and terribly bad for Hong Kong and it’s citizens.

 

 

Dolce Far Niente

 

This is the Italian art of doing…nothing. The Dutch have now put their spin on the same thing and called it Niksen. There is no such concept in the UK which has got the liberal left agonising and asking whether we should indeed embrace…nothingness. Well at SGM-FX we are lucky enough to have that well known South African import, Richard. When asked what he plans to do over a weekend he invariably replies: “Just chilling” which in the lingo of “Patney” (Putney) and Richard means doing sweet FA!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 19th

British Tourists: Shock Story

 

This week the theme has been shock horror GBP buying less foreign currency than a year ago. Readers of our Daily will have had ample chance to buy their currency in advance for this summer. Travelling abroad on business last week I was indeed duly shocked to be offered just EUR 0.8 for my GBP at the airport. Thankfully I had bought my EUR in advance and had loaded up my SGM-FX Currency Card. If you have not already done this, here is another chance to snatch FX victory out of the jaws of currency defeat thanks to the canny folks at SGM-FX:

Step One: Register for the SGM-FX Currency Card.

Buy ZAR and fly to South Africa-it’s actually cheaper to buy ZAR now than a year ago.

Too far away? Book Turkey-its currency is also cheaper this year.

Too hot?

Book Iceland. Another cheaper currency in 2019.

Then you can be the geyser in the know…! (Sorry)

 

 

Bulgarian Tax-not (quite) a contradiction in terms

 

For almost all of the 8 million Bulgarians paying tax: a flat tax rate of 10% applies for individuals on personal earnings and also at 10% on companies as corporation tax. However a cyber attack on the country’s tax office has meant that all taxpayer details have been stolen. Vladislav Goranov the finance minister has apologised in parliament.

We can only look both at this simple flat tax approach and also at such attractive rates with envy. The Bulgarian Lev moves around quite a bit with a high of BGN 1.58 and a low of BGN 1.85 versus the USD in the past 3 years. Personal inconvenience of stolen tax details and exchange rate volatility is more than outweighed by that tax regime!

 

 

El Chapo

 

Hard on the heels of El Chapo the most notorious Mexican drug baron ever, being handed a life sentence plus 30 years -which for a 62 year old really does mean a life sentence-comes the news that his net worth has dipped below USD 1 billion following his fine of restitution of an eye watering USD 12.6 billion. It’s always tough for an ex billionaire to discover that he is no longer a member of the B Club: a rite of passage that most of us will never experience(!)
 

 

 

 

 

 

 

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 18th

The Evening Standard yesterday ran with an editorial wedged between the questionable and the totally unreadable – usually about page 8 for those unfamiliar with the free London newspaper edited by former Chancellor George Osborne. They attempted to depict the future dichotomy that their inevitable Prime Minister, Boris Johnson, will face: between a swift US deal and no US deal. Pander to Trump and he’ll notice blood in the water, distance himself from exercising the “special relationship” choosing instead to wait for the right trade deal and you risk kicking the can down the road for years. 

 

Speaking at an event in London yesterday night following the printing of the paper, Johnson moved to favour the latter option and not to rush into a deal with his similarly floppy haired counterpart across the pond. The candidate for PM, when speaking about the potential for a deal, claimed “it’s not something that’s going to be done instantly”. On a horrific day for the Pound in markets where implied volatility jumped through the roof and the spot value of the currency fell sharply, Boris also suggested it won’t add a huge amount to GDP quickly but will support the economy over time. Reacting to the scene again this morning European trading is more volatile than in previous day with a mild recovery in the Pound, leaving the currency just shy of its 27-month lows. 

 

The South African Reserve Bank will publish its latest monetary policy decision today. The expectation is for the monetary policy authority to cut rates in the face of sluggish economic activity where a rising proportion of debt repayments versus total household income is now as high as 9.3% in Q1. The incumbent interest reward continues to feed a huge Rand appreciation as a result of the profitability of a carry trade, however, with global tightening in focus, South Africa cutting rates in unlikely to distort those metrics immensely. Surprisingly, therefore, a rate cut probably won’t hurt the Rand as much as it might be thought to. 

 

It’s been suggested that over the next two quarters, the rate of return from the South African (private) Central Bank will fall to 6%, from its present lofty heights of 6.75% before pausing to observe the effect. With the best part of 50 basis points worth of cuts for the rest of 2019 still priced into US rates this week, the start of 2020 would, de facto, still see the interest rate premium of South African rate products over US products at 4%. Therefore, presuming that monetary policy adjustments announced following the conclusion of today’s SARB meeting aren’t overwhelmingly severe, there is still room for the Rand to continue the appreciation that it has delivered in the past couple of months. 

 

A lower rate of exchange would, all other things equal, boost economic activity as SA assets abroad become relatively cheaper, boosting demand. However, given the stock of hard debt (public borrowing repayment obligations denominated in foreign and more stable currencies) the State’s fiscal sustainability must also be brought into the frame. So it’s not really all things equal – if the Rand’s value falls too far and the central bank cuts too heavily today, then SA’s ability to repay debt in foreign currency also falls heightening the risk of a Moody’s ratings downgrade and the exodus of billions in investment grade bond holdings. For a consistently underperforming, squabbling and late Central Bank, there’s a lot to play for today.

 

 

 

Discussion and Analysis by Charles Porter

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