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Morning Brief – US-China Trade War

US-China Trade War

 

This Sunday 1st September sees the first of two rounds of U.S. tariffs of 15% on $300bn of Chinese goods which will hit a range of food such as meat and cheese as well as clocks and musical instruments. This comes on top of the tariffs on $250bn of goods that are already in effect. It is easy to lose sight of what this trade war actually means to individuals, but Sunday will make that even more clear to Americans-and the Chinese.

 

 

Portugal and the UK

 

For historical as well as strong cultural reasons, the UK and Portugal have been close for hundreds of years. That translates into 80,000 Brits living there and 2 million more visiting Portugal every year which represents 25% of all Portugal’s visitors. Portugal is the gateway to the Lusophone market-Brazil, Angola and Mozambique which amounts to 250 million citizens so very relevant after 31-10-19. What about wine? 75% of all Portuguese wine exports are now non fortified with the balance of 25% being white and red port. That non fortified wine sector is a very large and growing market and the UK imported 38,100 hectolitres or 3,810,000 litres or 5.08 million bottles or even enough for a party at oh so popular SGM-FX newcomer Nick’s place: Vinho Verde anyone?

 

 

Brand Centenary Approaching

 

In 1920 Filippo Della Valle founded what is today, the Tods footwear, leather and clothing brand. This is a truly international business with assets of over EUR 1 billion, 3100 employees and 216 stores on every continent and in many countries stretching from Australia to Brazil. SGM-FX follower of fashion Charles has his eye on a pair of uber chic black leather loafers in the on-line sale as he admits his orange boat shoes are well past their time -if indeed they ever were….will we recognize him?!

 

 

Final Silly Season Story for August

 

It must be the unseasonal weather in Aberystwyth: Glyndwr Wyn Richards was given 3 penalty points for driving a car with another car on its roof. Glyndwr’s plea that he was on the way to a scrapyard fell on deaf ears and the beak also gave him a £80 fine a victim surcharge of £30 and costs of £85 for good measure on the basis that he was using a motor vehicle in a condition likely to cause injury. There goes another great idea from Uber!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Overreaction

Overreaction
 

Yesterday saw the implied probabilities of a no deal exit from the European Union rise within betting and foreign exchange markets. The source of the threat stemmed from Boris’ approved request to Her Majesty to prorogue Parliament. Translation: make lawmakers come back to work later than planned to prevent legislation legally blocking a no-deal exit from the EU from being created and passed. 

 

A flight to safety saw money rush out of the Pound and into more defensive assets. Treasury yields in the UK fell once again as perceived economic risks mounted, increasing the market value of holding low reward but heavily defended money. The Pound lost around 0.7% at worst on a trade weighted basis and up to 1% against a rising US Dollar. Overreaction? No! Not even a little bit. 

 

The overreaction came on Tuesday. Pro-remain MPs, some 200 strong, have signed a promise to sit and contest the government on any course that would target a no-deal exit on 31st October. Upon the suggestion of either passing legislation to demand the government to seek an extension from the EU or setting up a rival parliament to undermine the government, Sterling rose some 0.5%. Overreaction? Yes! 

 

If you look in terms of pure value the Pound’s reaction over the two days should tell us that 200 MPs signing a letter is half as important as granted permission from the Sovereign to forbid Parliament from stopping a no-deal. Let’s put that impact into numbers to quantify the impact. There’s about 2.9 trillion quid in the UK system, that’s the amount of money in existence using a fairly middle of the road measure of the breadth of money called “M3”. So, Tuesday’s news of opposition to a no-deal added about 14.5 billion to the value of that money and yesterday’s no-deal development, even certainty as some yesterday said, added 29 billion onto that value. 

 

The relative impact in markets of both events is staggering given the fact that 200 MPs is less than even the Labour Party alone have in the House of Commons. To set up a rival Parliament 2/3s of MPs would have to defy order, equal to 434 of them! So what Tuesday really showed is that Parliament has less than 50% of the number of people required to do anything about Boris’ no-deal push! Wednesday delivered something real, something certain, that will, negotiations and backstop permitting, force the UK out of the Union on Halloween with WTO standards and an alien status with respect to the Union. Yesterday may well have been worth losing 29 billion from the value of UK money but Tuesday isn’t worth a penny on that!

 

So why?! Well, market reporting and positioning data shows us that for every market participant long of GBP (betting that it will increase in value), there are 3 others that think it will go down and have put their money on it. Think about it: Every time the price goes down and your bet gains in value why would you do anything? You wouldn’t! You take the appreciation and have no incentive to change your position in the market so there’s limited market action and therefore little price action. However, when things start to look up and you’re going to pay for that improvement hand over fist you do something about it: you get the hell out! You buy back the instrument you’ve bet will do down and thereby add to the aggregate demand for Sterling to protect yourself from losing any profit gained and potential losses. The lesson to take away is that good news will sell from now on – it has the potential, given market positioning, to rally the Pound well above its post-Brexit range. Bad news, no-deal rumours and developments will only marginally force Sterling to sell off. Watch out then for any change in tone from Johnson not surrounding the prorogation but in Brussels. Amidst the whirlwind Johnson is creating we’ve missed that he’s only after a removal of the backstop from May’s withdrawal agreement that had the support of the European Council (admittedly not Parliament). Boris’ government is happy to the withdrawal bill (which for the record is far less than the value the Pound lost versus its peers overall yesterday) and it’s okay with the 599 pages of the document besides that. Watch Brussels, watch Ireland and watch Downing Street for any sign the backstop could go because the Pound will fly. 

 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – UK Consumer Spending

UK Consumer Spending

 

Bags of confidence from the UK consumer in July despite what both Westminster and the press are telling us about the UK population being on the edge of despair: 95,000 mortgages approved amounting to £26.1 billion, credit card spending up 8.2% to £12 billion from the same month in 2018-the highest on record and a statistic that will have the Bank of England worrying-and amount borrowed through loans up 9% and overdrafts up 1.7%.

 

 

Never Mind the Bollocks

 

No we have not taken leave of our tenuous grasp on currency markets! The Sex Pistols seminal album largely credited to bass guitarist Glen Matlock who was replaced by Sid Vicious(briefly until his death in 1979) turned 63 this week. You would have got extremely long odds in 1978 that Glen would have reached 1980 let alone 2019, but we are glad to report that he has not sacrificed his principles by continuing to join tours such as Filthy Lucre despite his net worth of $14 million.

 

Here’s a sample:

People said we couldn’t play
They called us foul-mothed yobs
But the only notes that really count
Are the ones that come in wads

 

As the Sex Pistols also sang:

God Save the Queen!

 

 

From the Mile High Club

 

Its been a few days of pranks: first on flight KLM 420 from Amsterdam to San Francisco, the plane was stocked with marijuana filled Space Cakes from a so called Amsterdam brown café which meant that both passengers and crew were by turns giggly, hungry and sleepy before circling San Francisco and being allowed to land.

Then a group of metal detectorists who had failed to enthuse those forced to listen to their tall tales of detecting in High Melton (geddit?) were slipped a potent batch of hash cookies with unfortunate results and some illness. The editor of that well known publication Treasure Hunting Magazine made an official comment, but it was so dull that it was not reported.

SGM-FX detectorist Richard has put away his metal detector in case he’s slipped a cookie, so all that buried treasure in Patney (Putney) will remain undiscovered…..

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 27th

Summer Turkey

 

An escalation of the trade war in the first half of the fine August Bank holiday weekend gave way to calmer headlines and reprieve at the G-7 in France. Plainer sailing has greeted markets so far this morning with major pairs priced relatively in line with their Friday close. However, there were a couple of ships capsized in the chaos of the weekend.

 

The leader of the free world took to Twitter and showed us rather unequivocally how he felt about Sino-US Commerce:

 

“Our great American companies are hereby ordered to immediately start looking for an alternative to China…”

 

Sure, a presidential decree doesn’t have a great deal of bite when delivered from some celebrity’s personal twitter account. But the former US Apprentice star is swift with regulation and his propensity to put something on official paper accompanied by that god-awful felt tip pen scribble that he calls a signature should not be underestimated. It’s this fear that leads investors to react violently to any of Trump’s tweets that threaten stability and international order. The same thing happened this weekend and there’s three important things you need to know to make sense of today’s market: 1) the defence 2) the Lira and 3) the trend.

 

The defence: in immediate reaction to Trump’s tweet and the rhetoric of his inner-staff equities sold off like they were going out of fashion. An immediate 2% drop in the value of equity futures contracts confirmed traders’ concerns surrounding an escalation of the trade war. The defensive move favoured US treasuries which caused yields to fall to only an inch away from their record low during the Brexit referendum. The falling yield didn’t undermine the US Dollar this weekend and into the Monday open given its status as the underwriter of international trade and a safehaven in its own right. The most popular defensive currency trade was to buy the Japanese Yen in a flight to safety. USDJPY crossed through 1.05 once again. But the most interesting event was the flight from risk not to safety.

 

The lira: Turkey’s currency has had a torrid time over the past couple of years. Erdogan’s leadership has long been a target of Trumps twitter rage and investors too have been concerned about the economy and its politics and consequently its currency. This weekend the move in the Japanese Yen and flight from risk led holders of the Lira to dump it, creating yet another flash crash for the currency. The Lira came back gradually from its crash but the move confirms that the Lira is one of the pariahs of the foreign exchange market. The ability for a risk off move to create a flash crash shows us how little confidence investors have in the currency and gives us the expectation that it could continue to be fragile in the coming months – it’s always first in line to be dumped. The price of the Lira versus the Dollar declined by 12% during the market singularity. But that won’t help you if you’re not involved in the Lira.

 

The Trend: now this can help you navigate the rest of the trade war. Whilst market reaction was significant to the rise in tension the fall out was once again less significant than that witnessed after previous episodes. Average volatility is declining each time the trade war comes into focus meaning that price action surrounding battles in the trade war is less severe each time. Now we could say that’s just natural; a threat to trade is already priced in so when it rears its head again less happens. But it doesn’t look like that’s the case. A tariff is a direct threat to trade and, if anything, the rising volume of goods penalised by the sanctions has a compounded effect on global growth expectations so, if anything, each battle should see volatility more severe than the last event. Instead we can argue then that the market is caring less about the trade war and we could expect a smoother ride moving forward.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 23rd

Squashed Tomatoes

 

The threat of a US tariff on Mexico’s tomato exports of 17% has been lifted. In the 1980s every US citizen consumed 5.5KG of tomatoes annually; that has now increased to 10KG. So a big deal for US consumers and a very big deal for Mexican tomato growers. Caramba!

 

 

Covered Bonds

 

This is the name given to securities backed not only with mortgages but with the guarantee of the issuer and as such are considered low risk. Berlin Hyp have issued a EUR 1Billion security yielding minus 0.59% which is the lowest rate yet and another tale in the negative interest rate saga that we have been describing in the past few weeks. So not such a stretch to being paid to borrow money to finance property and definitely expect cheaper mortgage rate offers in the next few months.

 

 

California Dream

 

Following the piece on Texas, we have been asked to write about California which was claimed by Spain in the 1600s and named after an Amazon queen in a land named Califia from a novel . With no irrigation it was not a great place to live and work but things started changing when a revolution transferred ownership to Mexico in 1821 and then big time with the discovery of gold in 1849. Suddenly California became a sought after territory and was taken over by the USA following their victory in the American Mexican War in 1848 and was duly irrigated and settled. From a population in the 1820s of less than 20,000 California grew to 400,000 in the 1840s and today…nearly 40 million. California is now the 5th largest world economy with a $3 trillion gross state product larger than the UK but smaller than Germany.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 22nd

Brussels Sprouts Little

 

Sure, Johnson met Merkel in Berlin yesterday but you try and make a pun suggesting political frustration and Germany’s capital city! Suggestions welcome! Now, in the real world this week, Sterling has been pushed higher (Monday), dragged lower (Tuesday and Wednesday) on whims of reports of progress and then frustration on the European front. When Merkel initially hinted towards potential progress despite Johnson’s hardline Brexit stance the Pound picked up 0.5%. But as it became clear that face to face meetings would still result in nothing this week the Pound slid once again, giving back the majority of its Monday gains to its peers.

 

France’s President Macron has suggested that his base case for Brexit in now a no-deal. That’s not really surprising: Since becoming a member of the European Council Emmanuel Macron, a staunchly pro-integration French politician, has pushed towards unity in Europe. So any state, individual or movement attempting to undermine his efforts for integration is always met with contempt. As Johnson meets Macron in Paris today, we’d be wise to remember the Frenchman’s Europhilic persuasion.

 

Other member states have remained on the sidelines when commenting on the UK’s new Prime Minister and recent Brexit developments. I suppose that’s unsurprising in Italy, where President Sergio Mattarella attempts to pick up the pieces of his country’s broke coalition. As his efforts continue to try and piece together a governing body capable of respecting the EU’s budgetary requirements, you won’t have seen this many pieces inserted in the wrong places since that infamous episode of the inbetweeners. Italian risk has weighed on the Euro, compounding with German economic risk to produce an EURUSD just pips off of its August lows which, for the record, are equal to 18-month lows on this pair. Optimism has been found at market open this morning from French and German PMIs that show optimism in the German economy.

 

Those trying to navigate the Pound Sterling this week and next should remember that financial markets have a tendency to buy a rumour and then sell the news. What does that mean? Well, for example, consider last year when we were waiting for Dominic Raab, the then Brexit Secretary to potentially head to Brussels for an emergency meeting ahead of the Brexit deadline. Upon reports that he would go, the Pound rose aggressively. Upon confirmation that he was actually in the Jag, it jumped back down. Now today Boris will meet Macron but is also expected to meet Michel Barnier this week who, remember, is negotiating on the exact same mandate that the Council offered him when he met with his counterparts from Theresa May’s cabinet. He’s not the guy who can scrap the backstop or come up with many smart exit strategies for the UK so don’t expect much. But, this weekend, Boris will attend the G7 meeting in Biarritz, France. The people there will democratically represent about 54% of the EU population. This lot can decide what they want to allow the UK. Any headlines ahead of this event and whatever the rumour mill produces will determine the direction of the Pound and, with confirmation or denial, any gains made could be unwound so there’s a strong argument to be on your toes! 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 21st

Ten Best Countries to live and work in

 

1. Switzerland 

2. Singapore

3. Canada

4. Spain

5. New Zealand

6. Australia

7. Turkey

8. Germany

9. UAE

10.Vietnam

Source: HSBC Expat Explorers Survey

 

All countries and currencies that SGM-FX does business and a judicious apportionment between Europe(3) Asia(3) Oceania(2) and Americas(1).

 

 

Holiday Souvenirs

 

As people prepare to return to their desks following their annual holiday in earlier more innocent times, they used to turn their minds to buying a memento of their time away such as a teapot or a straw donkey. A French couple have gone one better: as they loaded their car onto the Sardinia to Toulon ferry, customs officers noticed it seemed low at the back. Upon opening the boot they discovered 40 kilos of prime Sardinian beach sand. Sardinia takes the theft of their island seriously apart from the fact that it is of course Italian and should be safe from thieving French tourists! Sand confiscated and French facing up to 6 years imprisonment in a Sardinian gaol. Presumably not in a sand castle.

 

 

Bugatti anyone?

 

Despite fears for the luxury end of the car market the Bugatti team allowed themselves a collective pat on the back last week at Pebble Beach. How do you follow the $4 million bumper sticker price for a Chiron? Simple: launch the 1577 horsepower Centodieci, limit it to just 10 and price it at $8.9 million. Result: all pre-sold for a 2021 delivery! SGM-FX petrol head James gutted to have missed out but was seen looking up the Matchbox version due out at the same time and about $8.9 million cheaper.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 20th

In the long run, we’re all dead

 

The quotation above is from legendary British economist John Maynard Keynes. These thoughts were offered in relation to the phenomena of fixed exchange rates but resonate strongly when considering yesterday’s market movements. US Commerce Secretary, Wilbur Ross, announced yesterday that the Trump administration would delay sanctions on the infamous Chinese Technology company Huawei.

 

Markets and consumers alike are alarmingly short-termist. One could easily imagine a dead financial world in which the value of money barely changes between months, years, decades but that’s just part of the human condition: we want everything and, in the words of Veruca Salt, we want it NOW. So when a large threat to trade is kicked yet another 90 days down the road, financial market participants have a tendency to forget it was ever going to happen in the first place. Now, hopefully they won’t all be dead in 90 days (!) but the long-run and its will-it/won’t-it uncertainty will lead to strong liquidations of defensive positions.

 

On the back of the news Gold, the ultimate safehaven in a financial storm, fell back below the key $1,500 per ounce level as the demand for safety fell. Equities rallied in the United States and Europe to the tune of 1% even as some of their respective currencies also gained in value. The US Dollar was the winner of the majors’ game as fears over German inflation and stimulus continued to weaken the Euro. Early in European trading, reports that suggested the German government was hastily preparing fiscal stimulus packages following negative quarterly growth and weak data led the single currency lower. In accordance with this move, the Bundesbank now anticipated a recession in Europe’s largest and most systemically important economy. The Euro lost traction throughout the day but promises of higher long run inflation kept the Euro in reasonable check against the US Dollar.

 

In the United States, the spread between the yield on 2-year dated debt and 10-year duration debt came back from last week’s inversion. Whilst discussing tariffs and trade within the technology sector, Trump also set his sights on the Fed, suggesting a 100-basis point cut was in order. To put that request in context that would mean that the overnight lending rate in the United States would be only 25 basis points more expensive than it presently is in the United Kingdom.

 

The interest rate differential is what drove the Dollar to such lofty heights in 2018. However, as is becoming increasingly more common, traders took absolutely no notice of the request by President Trump, pricing interest rate expectations largely in line with pre-declaration levels. The delay in tariffs and concomitant decrease in risk to global growth prompted investors to unwind long-duration debt holdings in anticipation of higher future growth and pushing an inevitable recession further away. The widening yield spread between the US and Europe, reinforced by improving domestic growth expectations, led the Dollar to a healthy 0.2% intraday gain yesterday. Improving risk sentiment also supported Sterling that had faced a shaky European open following the weekend’s political narrative and leaked Brexit documents. We noted last week that CFTC data showed an extension of the number of contracts held that were betting on the Pound taking a tumble. Whilst last week saw some of these positions liquidated there still remains a significant propensity for short covering to shove the Pound sharply higher. As the government engages in a round of heavy propaganda to shore up sentiment, any lasting improvement in expectations could lead to a hasty closing of these bets and a bid for Sterling. 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 19th

Market round up

 

Equities managed a respectable gain on Friday which left the market at the end of the week looking less shaken if not exactly stirred. Oil WTI at $54.90 after news that the Iranian tanker was being released by Gibraltar raised hopes for a de-escalation in the Gulf. Gold firm at $1523 reflecting political and economic tension. Currency markets quiet on the back of little economic news on Friday.

 

 

Can Cross

 

This is the market’s name for the USD/CAD rate. Readers will not be overly surprised that despite the market rate being USD 1 to CAD 1.32 at the time of writing the international hotel group where I have been staying offered a rate of 1.10 or a margin of 17%! Nice work if you can get it: plenty of small businesses out there that would love an additional margin of 17%! Meanwhile I was not left cross as I deployed the SGM-FX PrePaid Card thereby saving myself that margin much to the disappointment of the hotel receptionist!

 

 

Flavonoids: Wassat?!

 

We all need to know: tea+apples+broccoli +oranges+blueberries=flavonoids added to our diets will help prolong our lives. Sgm-Fx’s Richard was burning the midnight oil late last night working out a recipe to include all of them simultaneously for his next braai (BBQ). Just don’t be downwind…….!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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St Mary Axe view

Morning Brief – Friday 16th

Rate cuts in the Mexico and US and the whiff of a Canadian political cover up

 

Following Mexico’s rate cut last night in an attempt to inject life into its flagging economy, it looks as if the market is increasingly pencilling in two further cuts by the Federal Reserve this year: in September and December with Pimco confirming that that is indeed their prognosis. Canada is transfixed by the latest Justin Trudeau scandal with tv channels endlessly sifting through the supposedly simple question as to who intervened politically in the SNC Lavalin corruption case. Trudeau looking sweaty and uncharacteristically dishevelled in tv interviews. The Loony (Can$) weaker on Teflon Trudeau looking anything but.

 

 

Trump: not just for Christmas

 

The short term stock market rally due to POTUS postponing 10% tariffs on goods as he did not want to spoil Christmas shopping is understandable on thinly manned trading desks at this time of year. However when the more seasoned hands came back to their desks and pointed out that those tariffs are only temporarily off and are still planned, the market needed more than the promise of tinsel to maintain that positivity. As of late last night the US market was managing to close a bit higher than it opened which is fragile comfort but nonetheless encouraging.

 

 

Texas Hold’em

 

200 years ago Texas was part of Mexico supported by Britain as a spoiling tactic against the emerging USA and was largely populated by Apache and Comanche Indians. 40,000 settlers from the USA arrived in the 1820s and ten years later they had grown to 150,000. The newly independent from Spain Mexican government watched all this from Mexico City and a number of battles ensued with the Texans determined to create their own country. This history explains plenty about the Mexican population of Texas today and plenty more about the spirit of Texas, the Lone Star state of America.

 

 

Not all nuts are equal – unlike Compliance

 

Sgm-fx’s self appointed health guru Compliance king Alex briefed us all at HQ on the fact that some nuts are much better for us than others: Almonds, Pistachios, Walnuts, Cashews, Pecans, Macadamias and Pine Nuts all made the cut.

The rest of us spent time working out that what was not included were Brazils, Chestnuts, Peanuts and Coconuts which we subsequently learnt are just less good for us. So not a bit like Compliance where it’s all good in fact, essential-thanks Alex!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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