team discussion

Morning Brief – Australia: A window on the future of print

Australia: A window on the future of print

 

Newscorp the owner of print and on line publications across the world has called time on more than 100 local and regional printed papers in Australia. All 110 will from now on only be available on line. This is part of a widespread review of the Newscorp business model. The Murdoch family have long proved themselves adept at reading market trends and this is an example of gaining first mover advantage as for sure others will follow suit.

 

 

Switzerland: Erotic Services

 

No not a contradiction in terms but all true: the Swiss hills were alive with the sound of sex workers preparing for a return to work yesterday afternoon. However wrestling, judo and boxing as well as nightclubs which all involve “close and sustained physical contact” are still not permitted. Kind of begs another question about those Swiss erotic services, but that’s not for here. Swiss Franc CHF slightly limper versus USD at 0.97.

 

 

Estonia

 

“Not many people know that”…with thanks to Michael Caine (87 and going strong if you didn’t know that ) but in this case it’s to do with saunas. Estonia not only has the climate but also the expertise when it comes to building and selling saunas for peoples’ back gardens. Since March the industry has started sizzling as sales have eclipsed the whole of the previous full year. Seasoned SGM-FX sauna aficionado Charles puts this down to lockdown rather than the wisdom of President Alexander Lubashenko from neighbouring Belarus; some readers may recall that it was Lubashenko who opined in April that 3 things would cure Covid: vodka, tractors and….saunas!

 

Have a very good and enjoyable weekend!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Here we go again

Here we go again

 

As the China-US trade war progressed and the Hong Kong protests continued last year, there was increasing chatter of the implications to the USDHKD peg. 2019 saw bets against the Hong Kong Dollar reach record levels as investors positioned themselves for a potential organised devaluation. We cautioned at the time that markets have tried to break this peg before but the Hong Kong Monetary Authority (HKMA) was a tough opponent to go up against. The most recent flare up in tensions has the trade front and centre in speculative foreign exchange markets, so what’s different this time?

 

Let’s start off with the background. The Hong Kong Dollar is pegged to the US Dollar with a managed exchange rate. The peg is defined by a band of between 7.75 and 7.85 HKD per US Dollar. The currency is therefore free to trade with a little over a 1.25% range. There is a considerable budget overseen by the HKMA to enforce this peg and since 2016 the vast majority of it has been depleted by its purchase of USD to that end. Due to the status of Hong Kong as a financial hub, the peg was created to support financial stability and encourage investment into the region. Given the managed nature of China’s own currency and the high level of trade between Hong Kong and the mainland, it was also created to prevent stresses between the two regions. The problem now grows for the HKD peg as the Yuan approaches record lows of 7.20 once again having broken its 7.0 ceiling.

 

The protests that began in the middle of 2019 centred upon an extradition bill. The legal initiative would have allowed extradition of Hong Kong citizens to mainland China. This sparked fear that Hong Kong’s judicial and civil powers would be undermined and the two systems of Hong Kong and the mainland were merging together. The potential threats were considerable to the Hong Kong Dollar and caused not only from the protests and the economic spillovers therein but also by the potential loss of its status as a financial hub. Coronavirus did what the removal of the extradition bill in September failed to do and stopped the protests in their tracks. Despite tangible stresses in the HKD market shown within forward rates and implied volatility measures, the spot rate stayed within the 7.75-7.85 band.

 

Protests have resumed in Hong Kong in recent days as China attempts to impose a new security law on China. Global condemnation of the measures has also followed. The law in its draft form aims to exist to prevent “splittism, subversion, terrorism, [and] any behaviour that gravely threatens national security and foreign interference”. The details of the law as they emerge are expected to mimic China’s own security law which gives the state vast power to control just about anything it wishes to. Beijing will effectively be in the driving seat of Hong Kong’s political economy.

 

The National People’s Congress have, as of a few minutes ago, passed the controversial draft. The HKMA thus far claims that there have not been any noticeable outflows from its currency or banking system. The spot rate interestingly remains towards the lower bound of the peg with considerable pressure building for it to rise. Yesterday, Secretary of State Mike Pompeo announced to Congress that Hong Kong is no longer politically autonomous. The special relationship between the US and Hong Kong has been one significant factor in facilitating the peg, encouraging investment in the region. As the political developments spill over into US-China tensions, the case of a higher USDHKD peg is growing.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Global Equity Markets

Global Equity Markets

 

A strong day for all equity markets and worth noting that the S&P Futures Index is back to the level it was at at the beginning of March. So pricing reflects plenty of optimism that the worst is behind us and buoyed on a wave of even cheaper funding, equity markets can resume their March upwards. So no bad news priced in which historically suggests that equity markets are vulnerable to any such bad news.

 

 

Polish Zloty PLN

 

Pre crisis in early March PLN traded at 3.80 versus USD. An abrupt slump to 4.25 by the end of March and now PLN is on the way back and trading at 4.05 as fears on both the pandemic and the economic fallout in Poland have receded.

 

 

Ladakh India

 

Almost 60 years ago In 1962 historic tensions between China and India spilt over into warfare due to border infractions. Scroll forward to today and once again tented encampments have sprung up In the Galway Valley due to the Chinese Belt and Road initiative which they have partnered in that region with Pakistan, India’s long time foe. China does not like the investment that India is making in roads and infrastructure in order to compete with China. So far the situation has not escalated to the level of interfering with the polo that is still being played and which Ladakh is famous for.

 

 

St Petersburg, Russia

 

This day in 1703 Tsar Peter the Great added to his already impressive accomplishments by founding St Petersburg despite understandable misgivings from his subjects that such an area of marshy swampland with all attendant inconveniences such as clouds of biting mosquitos might not be the best of ideas. However of the then population of Tsarist Russia which was 14 million, approximately 95% were serfs which meant that they “belonged” to Tsar Peter so his wage bill was next to nothing and there was plenty of it!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Cummings and Goings

Cummings and Goings

 

The most divisive thing in the United Kingdom since Brexit seems to be the adherence of the Prime Minister’s Chief advisor, Dominic Cummings, to the lockdown rules. If you’ve somehow managed to ignore the story, it concerns allegations that the senior advisor travelled an agonisingly precise 264 miles to a family home in Durham after contracting coronavirus. To add insult to injury, some days later and presumably after his recovery, he is supposed to have driven to a local beauty spot, Barnard Castle, where he took a walk. Punchy stuff, eh?

 

The UK public has been up in arms. I get it: ‘if the advisor [read government] isn’t following its own advice then why should I?’, people have been asking themselves. I’m not going to weigh in on the debate but some parts of it are relevant to the Pound. With Johnson’s defence of Mr Cummings on Sunday night and the advisor’s persistence that he “behaved reasonably and legally”, a wedge has been driven between those condemning his actions within the public and the government. Twitter of course is a breeding ground of opinion and band-wagonning. But people expressing their opinions there seemed to truly feel the actions of the advisor were indefensible and therefore, to them, the rules of the lockdown no longer applied.

 

There is a reason that the response to coronavirus has been framed as a war – it is to invoke a sense of solidarity within the public to prevent people from shirking the rules. An appeal to the so-called Blitz spirit is often a far more powerful tool than fines or penalties. But it feeds upon one thing: trust. If public trust is dented in a meaningful way then it could inhibit the government’s ability to enforce its gradual transition to stage three of the lockdown and on towards social and economic normalisation.

 

If people flout the rules they risk undermining efforts to control the R0 rate – the rate of infection – and the number of cases will rise along with the reintroduction of tougher lockdown measures. All in all the UK economy would open up slower than those nations that achieve a more coordinated emergence from lockdown to the detriment of the GB Pound. The politicisation of colloquialisms is a particularly dangerous tool. Unfortunately the “do as I say and not as i do” could prove to undermine Johnson’s government.

 

Unsurprisingly, GBP didn’t care a great deal yesterday. Not only was volume traded thin given the UK and US holidays yesterday, the Pound is already at discounted levels. More importantly the issue is not, or at least shouldn’t be in the eyes of the market, significant enough to destabilise the government. I suspect this will be long forgotten soon, however, it is worth noting one potential impact upon the Pound from developments in this story.

 

The former role of the senior advisor in Brexit undoubtedly has an influence upon the public’s varying perspective. Given the pivotal moment that Brexit negotiations are about to reach a resignation from Cummings could even prove GBP positive. Cummings is known to favour a hard Brexit with a persuasion towards a ‘Singapore-on-Thames’ style of economic and political distancing from the Union. Britain has until 30th June to request an extension from the EU to the transition period otherwise its out on 31st December. By removing the risk of Cummings encouraging the position of Johnson to allow the deadline to expire, the Pound could rise in value.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Today Spring Bank Holiday in the UK

Today Spring Bank Holiday in the UK

 

And also in the USA (Memorial Day) as well as the Middle East and other Muslim centres celebrating Eid Al Fitr and the end of Ramadan.

SGM-FX is working a full day today ready to support our clients and what is shaping up to be a busy time at the start of the last trading week in May.

 

 

US Dollar and Oil

 

The safe haven trades were piling on over the weekend following renewed tensions between China and the USA-this time due to China announcing it would impose a new security law on Hong Kong which will in the market’s view see a return to scenes of civil unrest in Hong Kong. The offshore Yuan traded at over 7.16 to the USD and the onshore Yuan was also markedly weaker. Other currencies that suffered in the light of the stronger USD were the Norwegian Kronor, GBP Pound, the Australian Dollar and the New Zealand Dollar.

Oil fell about 0.2% on fears of further economic disruption caused by those USA-China tensions. However WTI at $33.25 while not buoyant is still much better than it was a few short weeks ago.

 

 

Bonnie and Clyde

 

86 years ago on May 23 1934 outlaws Bonnie and Clyde immortalized in the 1967 film by Warren Beatty and Faye Dunaway were ambushed by a sheriff’s posse on a country road in Louisiana and were shot multiple times in their car which was found to be full of weapons and ammunition which were of no use to either Bonnie or Clyde.

Serge Gainsbourg and Brigitte Bardot wrote and performed a romanticized song in 1968 of what was a much more humdrum story:

 

Vous avez lu l’histoire de Jesse James

Comment il vécut, comment il est mort
Ça vous a plu, hein, vous en d’mandez encore
Eh bien, écoutez l’histoire de Bonnie and Clyde

 

British singer Georgie Fame sang it in English and here is the last verse which sums up what turned out also in fact to be the last verse for Bonnie and Clyde:

 

Acting upon reliable information
A Federal Deputation laid a deadly ambush
When Bonnie and Clyde came walking in the sunshine
A half a dozen carbines opened up on them

Bonnie and Clyde
They lived a lot together
And finally together
They died

 

For those of you able to enjoy the sun and a day off today, have a great day!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Figures

Morning Brief – Sri Lanka

Sri Lanka

 

It was this day in 1972 that Ceylon became the Socialist Republic of Sri Lanka. Sri Lanka’s documented history spans 3,000 years, with prehistoric human settlements dating back at least 125,000 years.

Nearer to today and rather more pertinently, the Sri Lanka Rupee is trading at 186 to USD less than 5% weaker than where it stood a year ago, so an example of how not all emerging markets have suffered versus USD.

 

 

Airlines and their Market Capitalisation

 

The five largest in the World are in $ Billions as follows: SouthWest 14 Delta 12 United 6 IAG 4 Lufthansa 4 or $40 Billion in total. Following Lockdown they are eclipsed by….Zoom now worth $48 Billion. Brave investors would buy airline stocks soon, as when a solution to international air travel restrictions is found, valuations of those larger airlines will snap back harder and faster than many other sectors.

 

 

Singapore- Chee-ki(n) Chappy

 

Keen to throw off its image of a technocrat-heavy and slightly antiseptic business centre, Singapore has prosecuted Lee Chee-kin aged 39 for breaking lockdown and not wearing a mask and oh yes stealing lingerie.

By no means a novice at this game, Lee has stolen smalls no less than 30 times in the past two years and just a year ago was found with more than 100 bras at home. This time he was spotted without a face mask and nabbed as he scaled a wall to steal from a washing line and add to his collection of ladies’ kit. Singapore Dollar impervious at 1.42 to USD. No reports yet on impact on price of underwear in the Lion City.

 

 

Charles Aznavour

 

Had he not headed to the great recording studio in the sky in October 2018, Charles Aznavour would have been 96 today. He wrote 1200 songs and perhaps his best Hier Encore or Yesterday When I Was Young was also released in English and goes as follows:

 

Yesterday when I was young / The taste of life was sweet as rain upon my tongue,”

“There are so many songs in me that won’t be sung … The time has come for me to pay for yesterday / When I was young .”

 

Have a sunny and healthy weekend wherever you are!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – The Phoenix and The Fool: a guide to EURUSD.

The Phoenix and The Fool: a guide to EURUSD.
 

As the Euro approaches a 7 week high I thought it important to qualify the recent rally in the single currency. It is surging across the board largely due to the integration measures that it is being seen to be considering. With Germany and France coming together last week to propose a half a trillion coronavirus support fund, the market is betting it will get the progress in the Euro area management that it has long desired. With most integration coming from the intergovernmental cooperation of France and Germany, the market is right to be optimistic about the recent developments. A quick word on what the progress looks like before we chuck cold water on the flames.

 

The proposal at present is for the European Commission to participate independently of nation states in global capital markets. It will then, subject to guidelines, be responsible to issue a series of loans and grants to ailing Eurozone members. For the first time in history a European Institution outside of a monetary authority will be able to raise money on its own with the backing of the monetary union for fiscal purposes. Okay so now for the downside: whilst states including Italy and Spain and much of the periphery are onboard, Austria and the Netherlands are staunchly against the program. These members threaten to preclude grants (that don’t necessitate repayment), in favour of loans. Universal accord is required to pass this initiative given the voting structure in the European Council and markets would be well reminded of the failed integration efforts of Macron and Merkel in 2017.

 

The Phoenix I’m sure will arise from the ashes and a mechanism for risk sharing be created but it is unlikely we see it in time for Coronavirus. The European project has always advanced in response to an external threat; its very foundations lie in a bilateral response to the Second World War. Having said that, it could well be too early to bet your bottom Dollar on Eurozone progress.

 

Forgot your password? I wish! Sadly the president appears to have “remember me” ticked as he slides onto Twitter once again the take aim at China. Did you know that Trump has recently broken his own record for the number of daily tweets since his term began? One fateful day in January Trump racked up a thumb-numbing 142 tweets in a single day. Sadly in lockdown the President appears to have a little more time for wreaking havoc on global markets with his online musings given he hasn’t got a golf club in his hand.

 

While the UK was sleeping last night the President has accused China of being “on a massive disinformation campaign” and failing in their management of the Coronavirus outbreak. The “incompetence of China” the President claimed, is the cause of the pandemic we have today. The President’s words injected further uncertainty in US-China trade prospects which damaged risk sentiment particularly heavily given the important role that Trans-Pacific trade will inevitably play in global economic normalisation. The news created a sharp rise in defensive Dollar demand to the detriment of the Euro.

 

EURUSD will continue to ebb lower whilst risk remains fragile. In a presidential election year expect the incumbent to cause controversy in public spheres to draw attention away from the leadership debate. Given how far off integration in the Eurozone could prove to be and how immediately risk sentiment can change, the Dollar should stay well bid against the Euro for some time. Once the realisation of tangible progress in the Eurozone integration project comes, the current account surplus that has survived in the Eurozone and improving economic conditions will provide the Euro its time to rally.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Singapore and I.T.

Singapore and I.T.

 

Population 5.6 million: Covid19 cases 28,000 or 0.5%. Deaths 22-a shining example of a successful virus fighting strategy. However the new Singapore contact and trace App with only a take up by 25% of the population has got off to a shaky start: 357 people were texted informing them they had contracted Covid19. Subsequent to that they received a second message saying that they should ignore the erroneous first message. Huge embarrassment for this technology hub South East Asian state. However no doubt a welcome(very welcome) I.T. glitch to the 357 recipients of that second message. Meanwhile Singapore will be 75% back to normal in two weeks time on June 2.

The Singapore Dollar unruffled at 1.42 versus USD.

 

 

Ireland

 

Those of you who are planning an exit from LockDown and celebrating by running a marathon, should take note: the Dublin marathon due to be held on 25 October has been cancelled which does not bode well for the London marathon rescheduled currently for 4 October.

SGM-FX’s Compliance man in the running vest, Alberto has been seen pounding the pathways of Wapping in recent weeks. However he has been keeping his heating turned up in this hot weather due to misreading the O on the thermostat: O in this case does not mean Off but On permanently Overnight! Nothing to do with it getting lost in translation, just an obtuse control panel; Alberto doubtlessly doing what jockeys the world over do for extra weight loss and that crucial extra performance : crank up the temperature and sweat off those surplus kilos!

Caramba: what a scorcher-Olé!

 

 

Ramadan and Return to work

 

Will finish on Sunday 24-5-20 and the Eid al-Fitr celebration will follow next week. This is being monitored with more than the normal amount of interest both within and outside the Gulf, since the Gulf states shut most of the business and financial markets in late March.

First day for a return to full business therefore in Kuwait, Dubai, Riyadh, Abu Dhabi and Bahrain will be Sunday 31-5-20. The SGM-FX Middle East desk is ready for the consequent doubtless pent up demand for Middle East access to global currency markets on June 1.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Valuation Check

Valuation Check

 

As the second trading day of this week begins it is apparent that the market is enjoying a wave of optimism. Due to the distress in financial markets throughout the lockdown we have seen the cyclical price action of meandering sentiment feed through to the foreign exchange markets more strongly than ever. A light peppering of ‘good’ news has the capacity to drag up valuations across the fx spectrum. It is unsurprising therefore that yesterday’s €500bn zoom call and a little direction on the UK’s future trading regime had the ability to normalise distressed valuations in every corner of the globe. Part of the reason for this phenomenon is that dramatic valuations and heavy risk premiums entice investors and speculators to hold riskier currencies as general conditions improve.

 

If you were a buyer of Rand and a seller of US Dollars and you received a price from the market of 6.3 ZAR to the Dollar you’d rightfully be fairly disgusted. What about as a Mexican Peso buyer, would you accept 9.3 MXN in exchange for your Dollar? These two rates would represent a 65% and a 60% over pricing of the currency you are purchasing versus the prevailing markets rate so I would hope not. However, you might be amazed that these rates can be considered the true value of the respective currencies. The valuation of currencies is a challenging subject and there are numerous models designed to price FX crosses. Yet one of the best by virtue of its simplicity is the metric known as ‘PPP’.

 

Purchasing Power Parity, PPP, measures the value of two respective currencies given the different level of prices within two currency areas. The foreign exchange market emerged after all to facilitate the cross border exchange of goods and services denominated in two different currencies so why not use this variable to determine the rate between them. If a basket of generic goods in the United States costs $100 and the very same basket in South Africa and Mexico costs ZAR 630 and MXN 930 respectively, as they in fact do, then we might justifiably conclude that USDZAR should be 6.3 and USDMXN 9.3. One key reason the market rate for the respective currencies is more than double this is the risk premium surrounding both emerging market currencies. This risk premium was stretched even further by the Coronavirus pandemic so as conditions improve there is ample headroom for emerging market valuations to normalise.

 

Yesterday saw emerging market forex valuations improve as trading conditions improved. Global risk sentiment was bolstered by evidence of progress in the European initiative to create a recovery fund. Via video conference yesterday, France’s Emmanuel Macron and Germany’s Angela Merkel announced their support and joint vision for the €500bn European support fund. Under the plans the European Commission would engage with capital markets to raise cash at the European level that would then be used to support the economies of nations most severely affected by Coronavirus. The move simultaneously made leaps forward in the problem of common debt issuance in the Eurozone and the European response to Coronavirus. The announcement took some systemic risk off the table and improved global risk appetite.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – America Inc

America Inc

 

With the Public Investment Fund (PIF) of Saudi Arabia topping up its holdings in US stocks, the market will take note and be of cheer especially as those stocks include Boeing, Citigroup, Bank of America and Facebook. PIF now holds $10 Billion in US stocks versus $2 Billion at the beginning of the year. Saudi Arabia is taking advantage of lower prices to diversify the nation’s wealth from an over dependence on oil. In case you are wondering PIF has total holdings of $300 Billion.

 

 

Air Canada

 

Having announced that they will lay off most of their workers, it does not look good for Air Canada despite Canada’s President Justin Trudeau making noises that he will look at ways to help the beleaguered Canadian aviation industry. The Canadian Dollar has weakened by a net 5% in the past 3 months versus the USD having at one point been as much as 10% worse. Natural resources rich Canada represents good value if one is prepared to be patient and in these times of social distancing has plenty of space with a population density of just 4 people per square kilometer versus 259 in the UK. If you can get there of course!

 

 

Portugal-the dustbin of Europe

 

This would be a grossly unjust description of our old ally and friend and of such an attractive country, but their reputation as such has been created by the industry that they have built in processing other European countries’ waste. The cost of processing a tone of waste in Europe is on average EUR 80 but Portugal charges just EUR 11. Portugal has called a halt to further deliveries and this is causing somewhat of a backlog with 246,000 tonnes being turned away so far this year.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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