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Morning Brief – Where do we go now?

Where do we go now?

 

Sterling has weighed heavy into the start of this weak. Economic data has been revised down for the first quarter of 2020 to -2.2% from a figure of -2.0% previously estimated. The reason for the revision was a deterioration in the current account showing that ahead of the pandemic the UK imported a higher value of goods than previously thought versus what it exported. With a rapidly increasing budget deficit the data revision reinforced concerns over a ‘twin deficit’ problem in the UK economy, a situation that markets are particularly wary of.

 

Piling on top of this hard data were statistics on mortgage approvals. The reopening of the housing market in May led analysts to settle on a consensus forecasts of 25,000 mortgage approvals for May, up from 15,600 for April. The data did not show such a dramatic improvement and instead mortgages approved last month fell to a record low of 9,300. The data portrayed an image of an economy suffering from uncertainty with investment decisions potentially being put off. The data combined to undermine GBP sentiment pushing cable (GBPUSD) to one-month lows and GBPEUR to three-month lows against a strong Euro.

 

The latest round of Brexit talks got underway yesterday with the EU and the UK maintaining their language of commitment to making progress and securing a deal. However, the lack of specificity and detail provided a further reason for underwhelming GBP demand in the market. Behind the scenes there is a lot of optimism for how a deal could emerge. However, progress is still frustrated in high-level talks by the same old stumbling blocks. Johnson’s plea to the EU last month to get the ball rolling has encouraged comments of compromise on the level playing field and the role of the European Court in enforcing the deal. However, there is still no evidence of progress at the level of chief negotiators or their deputies.

 

Tomorrow, Germany takes over the six-month rotating presidency of the Council of the European Union. In the European Union decisions are primarily made between two bodies: the European Commission and the Council of the European Union. The former consists (probably) of the individuals that Farage & co. labelled as unelected bureaucrats during the referendum campaign. The Commission holds a monopoly on the right of proposal – it has the right to suggest law for the ratification and debate of the Council of the European Union and Parliament (don’t worry about the Parliament). The Council of the European Union in turn negotiates and adopts EU laws, coordinates EU policy, develops foreign and security policy, concludes intra-EU and external agreements, and adopts the EU fiscal framework. Consisting of the government ministers of each EU nation it is responsible for the lion’s share and meaty aspects of the bloc’s coordination.

 

With Germany at the helm, the focus for the next six months is going to be the European Recovery Fund and Brexit. The rotating presidency affords some discretion in the agenda for discussion and will also give Germany’s opinion, as if it didn’t have it already, comparable influence within the Council. Angela Merkel, as Chancellor of a nation that exports tens of billions of Pounds worth of goods and services to the UK each year, is amenable to a Brexit deal. The hope for UK negotiators is that the ministers within the Council will use this presidency to secure accord and subsequently ratification of a Brexit deal ahead of the 31st December deadline. Although the short term may look bleak for Sterling, the Pound isn’t out yet. The market’s severe net short positioning against the Pound could soon be unwound if evidence of Brexit progress is made paving the way for sharp and persistent gains.

 

 

 

Discussion and Analysis by Charles Porter

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UK buildings

Morning Brief – UK Markets

UK Markets

 

GBP caught up in both its own domestic challenges as well as the competing currents of a fluctuating USD and what has been a strong EUR in past weeks has rather quietly been slipping versus most currencies. Fortunately, few Brits are watching the exchange rate due to travels restrictions, but come Wednesday this week, there will be much greater attention to the GBP exchange rate. The FTSE at 6,159 on Friday night while weaker on the week is still benefitting from markets’ confidence that the world’s monetary authorities will continue to bail out investors-successfully. Brent oil at $41. Gold at $1770 and Silver at $17.75. The eagle eyed among you will immediately clock the Gold/Silver ratio at 98. It was up at 120 in March this year and at the beginning of the year at 84. Those who look at trading the price relationship rather than buy gold would buy silver and sell gold at these levels- and have something sufficiently strong close to hand to fortify themselves-it’s a bumpy ratio to say the least!

 

 

Calcio Storico 2020

 

Each year in Florence Calcio Storico or “historic football”, the most violent form of macho street football that you can imagine takes place which has bare knuckle fighting and maiming as entirely acceptable tactics. The rules were written in 1580 when today’s enthusiasm for Health and Safety Measures was unknown. The matches which last 50 minutes are between the four neighbourhoods of Florence and are not for the faint hearted whether you are a participant or a spectator which often number thousands. This year of course the matches which were due to take place last Wednesday had to be cancelled. However all being well they will take place in the Piazza Santa Croce in Florence in September or failing that, those readers keen to watch will have to wait until June 24 2021.

 

 

Glastonbury Festival

 

As virtual Glasto came to an end last night with recordings of Lady Gaga from 2009 and Michael Stipe of REM from 2003, I poured myself a glass of Chateau Leoville Barton 1986 and toasted that great financial market revolution in the U.K. Big Bang that took place the same year as that amazing wine was made. Big Bang saw the end of so called single capacity and permitted stock brokers and market makers to operate from single entities. Sounds archaic? Well it was very exciting at the time and when everything seemed possible and much better for those of us emerging from 3 day weeks, labour strikes and 20% interest rates at the end of the 70’s! Sounds weird? It was.. but no more weird than Q2 2020. What will historians make of this period in 30 years time?!

Meantime here’s a bit of REM’s Everybody Hurts from 1992 and their fine album Automatic for the People:

 

When your day is long
And the night
The night is yours alone
When you’re sure you’ve had enough
Of this life
Well hang on
Don’t let yourself go
‘Cause everybody cries
And everybody hurts sometimes

 

Sometimes everything is wrong
Now it’s time to sing along
When your day is night alone (hold on)
(Hold on) if you feel like letting go (hold on)
If you think you’ve had too much
Of this life
Well, hang on

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Turkey

Turkey

 

Emerging Markets nervous on Turkey’s reported removal from the MSCI Emerging Market Index. Those nerves are due to the increasing difficulty of accessing the Turkish market plus the unpredictable behaviour of President Erdogan. If Turkey was removed, there would not only be a huge outflow of existing foreign investment but those future inward flows would be much reduced going forward. Turkey is rumoured to be on the verge of being re-designated as either a frontier or a stand alone market. USD drifting back towards the 7 TRL level at 6.86 which while not the lowest rate for the TRL does represent greater value for foreign investors- depending on the outcome at the MSCI decision making table.

 

 

Ganbei!

 

Those readers who have concluded lengthy business meetings over dinner late at night in Beijing, China will remember the world class headaches that they awake to the following morning. This is likely caused by the rounds of Moutai a liqueur produced by Kweichong pressed on them by their Chinese hosts. Incredibly the market valuation of Kweichong has overtaken that of Western names such as Disney and Coca Cola on the back of its growing fan base of Chinese drinkers and a tight cap on supply. All business owners can only look with envy at the company that produces Moutai and sells it for up to RMB 2600 or USD 370 a bottle where it is a must have at business meetings and weddings where heroic amounts are consumed. The production margin Is 92% and in the past two months the value of the company post lockdown in China has grown to USD 260Billion. If you are wondering what this wonder drink is like: Moutai has a soy sauce aroma and tastes of plants, grains and fruits. To avoid a self inflicted headache, I would recommend Westerners give both the drink and the shares a miss!

 

 

The King

 

It was this day in 1977 that Elvis Presley gave his final concert at the Market Square Arena in Indianapolis, Indiana to a crowd of 18,000. A month later at the age of 42, the world lost one of its most popular and enduring entertainers. The set list that final night included his 1956 hit, Love Me:

 

Treat me like a fool
Treat me mean and cruel
But love me

Break my faithful heart
Tear it all apart
But love me

If you ever go
Darling, I’ll be oh, oh so lonely
I’ll be sad and blue
Crying over you, dear only

I would beg and steal
Just to feel your heart
Beatin’ close to mine

 

Have a great weekend!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Perishing Pound?

Perishing Pound?

 

The brakes are on in the United States as coronavirus infection rates climb rapidly. Without any credible advances in therapeutics, the development of a vaccine, or a sufficient proportion of the population infected to create a herd immunity, we know that if life goes back to the way it was then we could risk casting ourselves back to the infection and death rates observed at the height of the pandemic. Whilst populations therefore might be eager to get back to life as it was, markets are sometimes cautious when they feel health policy oversteps the readiness of a population to accommodate the measures.

 

One example of caution recently has been in the UK Pound. The announcement that pubs, restaurants and other hospitality venues may open from July 4th was met with jubilance in many cases but it also had the effect of undermining the Pound Sterling. This bucks the trend we’ve been seeing of late where economic activity enticing un-lockdowns are seen as supportive for the underlying currency. The potential disagreement between the government and the Chief Medical and Scientific Officers, who are now joined by a group of medical experts, over the decision to ease the lockdown is the probable cause for the breakdown in this relationship.

 

A deteriorating global risk appetite within markets is also responsible for the inverse relationship between lockdown easing and currency value this week. The handling of the lockdown in the United States has been a tangible failure for President Trump and one that is likely to have lasting effects on the US and global economies, not least the Presidential election later this year. As the incidence of infection across many States has been gradually rising, questions have been raised about the United States’ readiness for degrees of social normalisation. With an increase in infections yesterday alone of more than 38,000, those questions have been answered: No! Those States worst affected, so far seemingly isolated to the South and West of the Union, have taken measures to reintroduce elements of the lockdown. This development has caused a perceived increase in global risk and prompted emerging market assets to underperform once again at the expense of safe havens including the Yen, Franc, Gold and US Dollar.

 

So-called G-10 currencies are the most voluminously traded currencies in the world and often represent the largest or most developed economies. They find stability from this virtue and are seen as a safer port in a storm. Not for the Pound at the moment though, claims Bank of America currency analyst Kamal Sharma. He believes that the former core currency now trades with price movements that are “neurotic at best, unfathomable at worst”. A particularly pessimistic outlook for Brexit, monetary policy and the economy have led the analyst to the conclusion. For now the higher correlation to emerging market currencies is substantiating these claims. It does, however, seem somewhat too early to draw these conclusions with trade deals still on the table and an economic recovery to orchestrate. It is likely that it is a little too early then to follow his recommendation to chase the Pound to parity just yet.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Global Markets

Global Markets

 

Oil closed above $41 (WTI) after POTUS clarified remarks about the status of the China trade talks which he announced remained intact. Markets were relieved and equities had a further positive day with FTSE up 5% from its lows last week and the US markets still back to their highs of earlier in the year. EUR is back at its best level since March versus USD and Gold at $1782 remains firm but has halted its rise after the initial rally of a month ago. Bitcoin for those of you with a crypto interest is at $9687 where it is currently finding it hard to break through the psychological $10,000 barrier.

 

 

Alitalia

 

Those with Alitalia vouchers or who are awaiting vouchers will be pondering whether they are likely to be better off on the news that the Italian government is poised to nationalise the airline which is down to its last EUR 232 Million of cash. On balance it must be better as it will make it harder in the future for Italy to shrug, say “Basta “ and walk away. For those of us who are wistfully looking at pictures of the Amalfi Coast, Rome, Venice and the Costa Smeralda from previous years, we are just thrilled at the prospect of being able to travel to Italy once again later in the summer. Meanwhile…

Cornetto anyone?!

 

 

Mick Fleetwood: 78 today

 

Mick Fleetwood has enjoyed what is euphemistically called a full life. Married four times including twice to the same woman, Mick is currently single and worth $20 Million having by his own admission spent tens of millions on partying and recreational drugs. At 1.95 metres the best known native of Redruth, Cornwall has drummed his way through various combinations of Fleetwood Mac in the past 57 years since he embarked on his musical career in 1963. Far and away Fleetwood Mac’s most lucrative album was the 1977 Rumours which sold 40 million copies(and counting) and here’s part of their excellent song, Songbird:

 

For you, there’ll be no more crying
For you, the sun will be shining
And I feel that when I’m with you
It’s alright, I know it’s right

 

To you, I’ll give the world
To you, I’ll never be cold
‘Cause I feel that when I’m with you
It’s alright, I know it’s right

 

And the songbirds are singing
Like they know the score
And I love you, I love you, I love you
Like never before

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Social Media Activism

Social Media Activism

 

The most controversial arena in politics over the past decade has arguably been online. From election scandals to fake news, Cambridge Analytica to Brexit, the way campaigns are received online has shaped the course of politics. Now social media is fighting back and is taking credit for President Trump’s embarrassment at his campaign’s Tulsa rally on Saturday night.

 

The Presidential race this year has been overwhelmed by the Coronavirus. As lockdowns have eased across the United States, the President and his Democratic rival are keen to kickstart their 2020 Presidential campaigns. The Republican Party rally that took place on Saturday evening was supposed to be a key public engagement for the President. Planners had forecasted a bumper turnout for the Oklahoma rally and the show of Republican force despite coronavirus was supposed to reinvigorate the President’s ailing campaign. What the President arrived to was thousands of empty seats.

 

The rally was forecasted to be so busy that campaign managers had even planned spill over areas where people could be entertained whilst watching the address from afar. In the end, there was plenty of room for all. The culprit? Korean pop and social media. In times gone by that may have been an unusual cocktail to blame presidential election woes upon. However, a campaign on social media platform, TikTok, coordinated fans of K-pop music to register en masse for the rally using their mobile numbers but, crucially, not turn up to the rally. The group managed to deceive the Trump campaign and the empty seats that the President stared out to on Saturday evening satisfied their efforts.

 

Overnight there was a volatile episode within foreign exchange markets. A dramatic risk-off move was created when the White House’s trade advisor Peter Navarro commented that the US-China trade deal was over. A rapid appreciation in defensive assets including the Japanese Yen and Swiss Franc took place at the expense of risk assets including emerging market currencies and equities. The move rapidly reversed when President Trump took to Twitter to announce that “The China Trade Deal is fully intact”. The Pandemic has not been a good breeding ground for Trump’s volatile style of Politics. His approval ratings have suffered and unsurprisingly his polling prospects have worsened. It is possible that in order to make up some ground we see a more presidential President in the coming months before the US election.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Germany

Germany

 

Jenns Weidmann, President of the Bundesbank has made a call this weekend which the rest of Europe including the UK would do well to heed-if indeed as we all hope that it is correct: Germany’s economy has passed the low point of the crisis caused by the Covid outbreak. So by definition, the only way is up. GBP at its lowest versus EUR in the past 2 months as EUR has a firmer look about it.

 

 

Saudi Arabia

 

The KSA Ministry of Tourism has announced plans to launch a tourist development fund with an initial capital of USD 4 Billion. Those who have visited the Kingdom will wonder how the initial challenges including the following will be overcome: long and difficult immigration procedures upon arrival, alcohol and other tourist recreational expectancies being forbidden, segregation of sexes on the beach and…the list continues. However, Saudi Arabia has long held this ambition and given the sheer size of the country, it must be feasible to create zones where more tolerance can be practised away from the hawk like watch of the religious police. One thing is for sure: KSA needs to diversify away from its dependence on oil- although with WTI establishing a new base at $40 that is looking much better than a few weeks ago. Saudi Riyal impervious to all this and steady at 3.75 v USD.

 

 

Russia

 

Between June 25 and July 1 Russia will vote on whether President Vladimir Putin is to be allowed to run for a further 2 6 year terms starting in 2024. Putin is 67 and will be 71 then so that would take him up until 83 years of age. Russia has a history of elderly statesmen but if Putin stays that long, he would comfortably eclipse all other Russian leaders times in office and all but one, Gorbachev in age who died at 89 but that was because he sensibly retired to his dacha outside Moscow at the age of 60.

Meanwhile on international markets the Rouble has strengthened versus USD to 69.42 in the past month in line with the rise in oil.

 

 

Summer Solstice

 

Yesterday saw top Druid King Arthur Pendragon aged 62 interviewed on BBC to mark the Summer Solstice and to explain why all good Druids should stay away from the A30 and the sacred site of Stonehenge. SGM-FX’s Charles pitched his tepee near Bishops Stortford over the weekend at his own rather small festival and apparently lit a couple of joss sticks before putting on some chanting on his iPhone  as he welcomed the sunrise over a glass of his French pale Rose wine favourite, Whispering Angel. You can keep the Druid in Charles away from Stonehenge but you just can’t keep the party animal in him down for that long!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Kiwi Dollar

Kiwi Dollar

 

The Kiwi or NZD has strengthened sharply in the past two weeks versus GBP. It was only at the beginning of April that it was trading at 2.10 and now has broken its previous resistance a 1.95 and has broken through to 1.93. GBP has of course weakened across the board but the commodity currencies including now the almost COVID free NZD have bounced back sharply from the dog days of a few weeks ago.

 

 

Luxury Goods

 

Chanel the flagship fashion brand has announced that it expects the impact of COVID to last for 2 years in the sector. However, because they can, and to protect their brand Chanel has also increased the prices of many of their sought after products citing higher costs of raw materials. So the price of that handbag you might have had your eye on has likely been increased by at least 10%. Chanel had 2019 revenues of $12.3 Billion and a healthy operating margin so can well afford to weather the storm raging through the luxury brand market.

 

 

World Sauntering Day

 

Today 19th June as almost nobody knows is that day. Established in 1979 at the Grand Hotel Mackinac Island  in Michigan USA in response to the then new fashion of jogging, sauntering or rather the art(?) of walking in a relaxed fashion is supposed to get us all to slow down and enjoy life. SGM-FX sauntering specialist Euan was seen trying out by throwing some slooow shapes along a near deserted Eastcheap during his lunch hour yesterday, his first day back in the office since 20 March.

 

Have a great sunny and healthy weekend!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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SGM-FX London skyline

Morning Brief – Growth

Growth
 

The word growth over the past few months has usually involved a discussion about the spread of Covid-19 and the change in the number of infections. But in normal times economic growth is discussed more as one of the main drivers of the value of a currency. Coupled with an appreciation of relative interest rates and you’ve got a fairly crude but workable model of the foreign exchange market. The virus has distracted classical projections of currency valuations based upon growth and economic fundamentals bringing about a new problem: How do you value a currency when each nation is in the same boat? Interest rates have tumbled towards zero in most developed economies and growth prospects are all dire.

 

I’m going to stick with the nautical theme to explain further. Let’s say you’re trying to figure out the path of G-10 foreign exchange – I.e the winners and losers out of USD, EUR, GBP, JPY, AUD, NZD, CAD, CHF, NOK, and SEK. Consider each of them a boat in a race across the Atlantic. Normally you’d place your bets based on the fundamentals of each competitor: how fast is the boat, how experienced is the crew, recent form etc. As the race progresses you’d trim or increase your positions on one or more boats based upon how that boat had got on in the race so far. For example, if AUD looked the best on the starting line but went the wrong way you’d start to shift your bets elsewhere.

 

But what happens when right in the middle of the race an almighty storm starts blowing? The relative position of the boats would be increasingly meaningless. Stuck in gale force winds in the middle of the Atlantic the question now is about who survives and can stay afloat. Even if you were on one of the racing boats you wouldn’t care which way you were facing you’d just try to keep your boat and crew above water. Those betting on the race would take as much risk off the table as possible but if they couldn’t exit betting altogether they’d orientate their bets on which ship they think is most likely to stay afloat.

 

That’s exactly what has happened in foreign exchange markets. The Covid storm initially necessitated valuations based upon a currency’s ability to weather the storm. In the height of the first wave of the pandemic, huge stimulus packages initially provided ballast to their vulnerable economies. This support was able to attract some value back to the currencies they concerned. Risk sentiment also became an even larger factor in market-wide foreign exchange valuations in the form of fluctuating feelings on whether the storm might go away altogether and will the race resume. As we enter the second stage of Coronavirus an air of normality is returning.

 

Stimulus is still important and there is no shortage of risk sentiment-induced FX flow. Markets continue to monitor the probability of a second spike with data coming out of the United States and China in the last few days painting a gloomy picture. In the UK today the Bank of England will present its latest monetary policy decision. The market is expecting an increase in the QE program of at least £100bn with a hold in interest rates at 0.1%. As ever the discussion surrounding economic projections and the potential use of negative rates will also be important for the value of the Pound.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Indian Railways

Indian Railways

 

Owned by the Indian government, Indian Railways in normal times operates 20,000 trains a day, has revenues of USD 28 Billion per annum and employs 1.3 Million staff. India has committed to electrify 100% of the network by 2023 and be carbon neutral by 2030. For any of you who have travelled on the 40% of their trains that are still burning coal, this feels ambitious, but who knows?! This week Indian Railways have announced that they are converting 500 railway carriages into hospital wards and at a stroke will create 8,000 new beds, so maybe that carbon neutral target in 10 years time is indeed achievable. Meantime India is both wanting and getting more hospital bed capacity- courtesy of Indian Railways.

 

 

The Sandwich

 

The story of how the sandwich was invented by John Montagu, 4th Earl of Sandwich who called for a late night snack of some meat between two pieces of bread is fairly well known. The trend caught on and pretty soon all of the aristocracy were ordering Sandwiches which then was a fad taken up by the rest of the populace. The Wall Street Journal described the sandwich as Britain’s biggest contribution to gastronomy which shows a singular lack of appreciation by our American cousins for other terrific contributions including Toad in the Hole, Jam Roly Poly, Spotted Dick and Shepherds’ Pie.

Moving on swiftly, the sandwich is facing a crisis with sales having fallen over the past 3 months in most cities by at least 50% and in London by 90%. Don’t write it off too soon as it’s a question of picking the sandwich bars that will survive such as, in our view at least, private equity owned Pret a Manger. Shares such as Greencore(down 24%) and Greggs are also worth following. Just in the UK, the industry is worth more than GBP 8 billion and employs more than 325,000-twice the Armed Forces and 5000 more than Tescos. Following the slur above from the WSJ, I researched the most popular sandwich in the USA, and the answer was grilled cheese. Unimaginative? Enough said!

 

 

Carole KingE

 

It was this day in 1971 that her album Tapestry went to Number 1 in the USA and stayed there …..for 15 weeks. Aged 78, 4 times married but now single and worth in excess of USD 70 Million, Carole KIng is batting on singing and writing , but Tapestry still has the definitive collection of her very best songs Including: You’ve Got a Friend

 

When you’re down and troubled
And you need some love and care
And nothing, nothing is going right
Close your eyes and think of me
And soon I will be there
To brighten up even your darkest night

 

You just call out my name
And you know wherever I am
I’ll come running, to see you again
Winter, spring, summer or fall
All you have to do is call
And I’ll be there
You’ve got a friend

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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