All posts by Charles P

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Talk Radio – Business Breakfast

Listen here to SGM-FX’s Charles Porter reviewing the morning’s papers with Talk Radio Business Breakfast host, James Max.

 

From Strictly to the Trade War; Billionaires to Brexit, find out what’s moving markets this morning.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 2nd

A Matter of Global Importance

 

It’s time to talk planetary defence. I’d be surprised if the coveted FEMA-NASA research event that has unfolded this week is not already at the forefront of your mind. However, if the 13th page of the free London newspaper the Metro or the ‘Strange’ tab of Sky News hasn’t grabbed your attention, fear no more, we’ve got you covered.

 

NASA, the National Aeronautics and Space Administration, estimates that there are in excess of 19,000 asteroids in close proximity to the earth. A joint venture between the Administration and the Federal Emergency Management Agency this week will produce a model of the devastation that the impact of a celestial object upon earth would produce.

 

Investigating similar events to those which are thought to be what caused the extinction of the dinosaurs some 66 million years ago, as with most things, the model can be explained with Brexit!

 

 

Brexit and Planetary Defence

 

The joint venture has come up with three solutions to a potential collision: steer the asteroid away from impact with earth; blow it into smithereens; let it hit but get people away.

 

Steering the asteroid – soon to be meteor – is what I’m going to call the Conservative-Labour compromise. By attaching an external body to the existing threat, one with its own momentum and force, we can change the path along which both bodies will travel.

 

As the Conservative party hurtles towards the deadline of Brexit, the attachment of the Labour Party can still achieve compromise and change the path of Brexit. Will the move be enough to avoid earth? Who knows, but at least as far as planetary defence is concerned, this is the favoured option.

 

Option two is to blow the asteroid up into millions of smaller pieces that, it’s hoped, wouldn’t present the same threat as the larger body. I call this the indicative votes option and May’s present Plan B.

 

If May’s talks with Labour fail to produce a majority behind a new Brexit comprise then the incumbent Prime Minister has promised to offer the Commons a series of indicative votes. These so-called ‘free’ votes are not governed by party whips or loyalty but rather ask Members of Parliament to vote based on their own individual preferences.

 

This resembles the blowing up of the comet, the destruction of it’s whole, removing its integrity, in favour of fragmentation where each constituent part contains less force than the whole. NASA has told us this week that this plan probably wouldn’t work. Instead, succumbing to the force of gravity, the pieces are likely to amass once again, reforming as a complete asteroid within the Earth’s atmosphere. So, Theresa May, perhaps you can split the party up into its component parts, but would the same old stagnation come back to haunt your Brexit plan? Well, NASA might think so.

 

Plan C – run and hope for the best. Move people out of the way of destruction and hope for the best, or hope the thing goes away? May has tried this throughout Brexit negotiations, kicking the can down the road achieving minor concessions in order to just about cling to office. Might hoping it all just goes away perhaps even suffice as a metaphor for the option of a second referendum?

 

The Pound has been trading strongly in recent days as a stronger appetite for risk leads investors to hold UK assets. As the Bank of England publishes its monetary policy decision this afternoon, the composition of voting within the Monetary Policy Committee will be important to understanding the Bank’s interpretation of the domestic economy. No hike is priced in for today’s event. Last night the Fed held its cautious tone on US monetary policy. The press conference lifted the Dollar off of its session lows while Chairman Powell hit back against President Trump’s desire for a rate cut.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 18th

Rand Resilience

 

South Africa’s Rand is one of the most freely traded emerging market currencies in the world. With limited protectionist monetary architecture against capital in/out flows and with no explicit targeted manipulation of the currency from the central bank, the Rand is subject to the whims of international sentiment.

 

With this in mind, consider the past week or so for the Rand: developments on Trump’s global trade war; IMF warnings of political uncertainty; condemning reports of decline; and a dovish central bank. Enough threats were levied at the exposed currency in the last seven days to make its chart appear more like the musings of a toddler with a green and red crayon as opposed to the market’s considered valuations of sub-Sahara’s largest economy’s tender.

 

Trade War

 

Holding on to a 3% gain against the US Dollar since the beginning of the year, developments on the resolution of Trump’s Sino-US trade war have failed to disrupt the Rand considerably. An environment of strong global growth is imperative for most emerging market economies who themselves are reliant upon international macroeconomic affluence. Stronger economies trade more frequently and openly with each other where profits can be appropriated by countries earlier in their development cycle. Any trade war aims to disrupt this harmony and fluidity to global trade.

 

Threats to the trade war’s resolution in the last week alone include speculation that President Trump may place “too much” power in the hands of the Chinese, at least from the perspective of US industry. The enforcement mechanism, according to Robert Lighthizer, is what’s left to thrash out for the successful resolution or cessation of Trump’s trade war.

 

However, the reciprocal approach to enforcement, according to critics of the arrangement, is leaving a sour taste that Trump might put Xi too close to the driving seat of US commerce. If the public, and strategic sectors, continue to rally behind this belief, it’s not inconceivable that the US President, not an individual known for his patience and inaction, could rip the rug out under the deal. This threat to global trade could have thrown the Rand into a spiral amongst other emerging market currencies, however, the Rand continues to hold its nerve… so far.

 

Warnings

 

The IMF and Jo’burg political-risk advisory, Eunomix, have not flattered South Africa’s political economy in the past few days. Yesterday morning, headlines claiming that the nation’s decline is the “worst among nations not at war” would logically serve as a reminder or revelation that the Rand might not be a good investment for those of a more nervous disposition.

 

Painting pessimistic forecasts for South Africa’s President Cyril Ramaphosa, the report claimed that state capture under his predecessor Jacob Zuma has left the economy in its weakest state since its former President Nelson Mandela held office.

 

Moreover, the report claimed that the populist policies including land expropriation favoured by the incumbent leader of the ANC versus the more orthodox economics adopted under President Thabo Mbeki, Zuma’s predecessor, are deterring the foreign investment required for South Africa’s long term recovery.

 

Yet still no flinch from the Rand which, yesterday, ended the day some quarter of a percent stronger than its opening price. So is it all just priced in – baked into the cake already? Well, having recovered more than 9% against the Pound since a sell-off at the end of last year, and 10% against the Dollar, I would be more inclined to suggest that fear and contagion have been, to a considerable extent, priced out and positioning surrounding the Rand and emerging markets resembles one that should allow a slew of negative headlines to spur a devaluation in the currency.

 

SARB

 

Yesterday, South Africa’s inflation rate was read at 4.5% – bang in the centre of it’s 3-6% target band and convincingly above the previous month’s recording of 4.1%. From the Reserve Bank emerged a rhetoric of “it’s too early to tell”. Particularly due to the external and fuel-price driven inflation recording, the Bank thought it imprudent to consider tightening (or rather not loosening further) monetary policy in response to the inflation result.

 

Denying the market’s justifiable expectations that stronger inflation might allow the nation to raise rates and reward holders of the domestic currency in a move that would be seen as positive for its value, the Rand still didn’t budge from it’s loftier heights.

 

The Rand over the medium-long run remains subdued, no doubt. It’s still a relative bargain compared to the immediate aftermath of the so-called Ramaphosa effect. However, the Rand has displayed remarkable resilience in the face of its most recent attack.

 

 

 

 

 

 

 

 

Discussion and Analysis by Charles Porter

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Trick Or Treat?

The British stereotype can be a confusing one. The French call us “Roast beef”, I suppose due to our affinity to the quintessentially British Sunday roast and, one would assume, partially in retaliation to being referred to as frogs. Internationally, are we not also supposed to love a good cup of tea and love a wait around governed by proper good-old queueing etiquette?

 

Well, I don’t. And Theresa May is, I suspect, about to be reminded by her own Conservative Party, those who oppose her in the House of Commons, and the UK electorate, that perhaps the well-tempered, orderly and patient British approach to things is a thing of the past or a figment of the imagination.

 

A European Council summit last night has confirmed markets’ expectations that the United Kingdom will not be forced to honour a deadline for leaving the European Union this Friday. Instead an extension of the Article 50 process of approximately six months has been agreed, with the new deadline of October 31st 2019 – spooky!

 

The offering reflects a win for France’s President Emmanuel Macron, who’s preferences appear to have been most closely reflected in the extension deal, restricting the more lengthy timeframes thought to be on offer by Germany’s Angela Merkel and favoured by the Council president, Donald Tusk.

 

The UK Prime Minister will be back in London today to sell the deal to Parliament. With her authority in the House falling by the day, I’m unsure whether last night’s deal will be something for the party to rally behind to keep her in the top spot. I can imagine Mr Johnson and Mr Gove, front runners in the race for her job, in rather high spirits this morning.

 

So is it bye-bye T-May, T-May goodbye? Perhaps not. One feature of the extension is a review period scheduled for June. This caveat will allow May to convince more Eurosceptic members, who might otherwise suggest she put down the tea cup and hang up her queueing boots, that this isn’t a six month wait around; if they get behind her deal this can be done by Summer.

 

The Pound was unchanged on the news as most market participants had expected a significant delay and had consequently priced out the risk of leaving the bloc tomorrow. May’s argument to achieve the extension in Brussels relied upon needing more time for cross-party talks with the opposition leader, Jeremy Corbyn. 

 

Sterling needs Parliament to swap the cup of tea for a piping hot black coffee and to get on with it. The Pound, that had broken its 2-year long ranges earlier this year on hope of a resolution and progress, looks in serious risk of falling back within this range once again. If it looks like we’re leaving with a no-deal come deadline day and Halloween 2019, foreign apples in the trick-or-treating bag might be welcomed for once!

 

A big day for central banks yesterday with an ECB policy decision and release of the US Federal Reserve’s minutes from its last meeting saw little change in market prices yesterday. A reminder of the dovish tilt to European monetary policy versus a US that is further along its economic cycle mildly reinforced the weak Euro strong Dollar trade evident since mid-2018.

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 25th

Once; Twice; Four times a winner!

 

 

The Pound was rewarded overnight by traders in the New York and Asian sessions, pushing the UK’s currency back towards levels not seen for some 20 months. Today’s session initially drew limited support for the Pound given the fresh resistance levels that the UK currency approached overnight. Positively, this afternoon, a headline crossed terminals that Julian Smith, the British government’s enforcer, had informed parliamentarians that the Brexit agreement can be reopened if an agreement is created to produce legally-binding changes to the Irish backstop. The news decreased the headwind that the UK government would face in improving the extant Brexit deal. Base case outcomes were therefore revised upwards slightly, allowing the Pound to enjoy a renewed bid and finish four days out of the five this week comfortably in the Green. The US Dollar has struggled today, losing close to 0.5% on the day. The reason for the fall is the Federal Reserve which comes into focus once again next week. The Reserve will publish its next interest rate decision on Wednesday evening next week with the Reserve widely expected not to raise rates. The pressure on US interest rates in late-cycle economic growth is allowing the Dollar to slide against its international counterparts.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 24th

EURgh.

 

 

Yet another dry, somewhat lacklustre and wholly uninspiring monetary policy press conference from the European Central Bank’s President Draghi. Eurgh!

 

 

During yet another round of disappointment to the long-term normalisation of European monetary policy, Draghi announced that rate setters acknowledged downside risks are growing, with the outlook for short run economic growth drifting lower. Draghi maintained optimism over the medium run that allowed him to reiterate the dreary and uncompromising forecast to keep incumbent monetary policy conditions intact at least through the summer of 2019.

 

 

Investors were not impressed by Draghi’s statement, selling the Euro in droves and forcing EURUSD well below its 1.14 upper bound, falling to an intraday low of 1.1306. The market still does not price in even a 10-basis point hike in 2019, showing its disdain for Draghi’s central bank. Immediately, the central bank does not anticipate a recession as its base case scenario. However, during the press conference that followed this afternoon’s event, super Mario did suggest that liquidity (read interest rates) will remain plentiful (read low) throughout the next decade.

 

 

The Pound traded within a tight rate today, flirting with the 1.15 level against a more turbulent Euro. Market remain in the lurch awaiting further news on Brexit ahead of Tuesday’s vote

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 23rd

Golden Week?

 

 

After a horrid close to last week with a loss in Sterling totalling some 0.4% on the day, this week has delivered a far brighter fortune to the Pound… so far. Soaring for the third consecutive day and putting Sterling on track for a record-breaking week. Enjoying a staggering 0.6% appreciation on the day, the Pound now stands close to key resistance levels at 1.15 against the Euro and the mid-1.31s. The change in the value in Sterling most closely resembles the shifting attitude of traders and investors with respect to the Article 50 deadline and the wider Brexit deal. Speaking at the 2019 World Economic Forum in Davos, Switzerland, the UK Secretary of State for International Trade affirmed his willingness for an extension to the Article 50 deadline. The pro-Brexit minister’s words lifted Sterling through the important 1.30 mark against a weakening US Dollar and paved the way to the lofty heights at which Sterling closed the day’s European trading session. Despite losing mild ground in the US Session so far, the Pound still remains well-bid. Progress in the House of Commons today also fostered support for Sterling with market participants growing increasingly confident that the UK will not drop out of the bloc on 29th March.

 

 

Speaking at Davos this afternoon, German Chancellor Merkel has spoken of the need for a swift return to “normal” monetary policy. Whilst the European Central Bank remains independent in its capacity to set monetary policy with a staunchly dovish stance towards policy, the political pressure from Europe’s largest economy did not go unheeded. The Euro therefore won today’s battle over the US Dollar with the cross fast approaching the key resistance level at 1.14. The ECB will publish its latest monetary policy decision tomorrow with markets waiting to hear how the central bank will acknowledge growing downside risks to European economic growth and dwindling market expectations for a 2019 interest rate hike. The Euro remains poised, therefore, for a rock day tomorrow.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 22nd

It’s in the fine print:

 

 

The universe of possible Brexit outcomes now more than ever resembles an outstretched Chinese hand fan. Spanning a spectrum of some 180 degrees from hard Brexit on 29th March 2019 through to its polar opposite, no Brexit at all, the decisions facing the Prime Minister, and increasingly facing Parliament, are growing ever more complex. Tabling an amendment to the government’s motion yesterday, the leader of the opposition, Jeremy Corbyn, has explicitly opened the door to a second referendum. Mr Corbyn, who still finds himself at loggerheads with Theresa May over her refusal to rule out a no-deal Brexit, has proposed identifying Parliament’s feelings with respect to several possibilities. Firstly, Labour’s amendment requires “ministers to secure sufficient time” in order to consider opposing options. Most importantly, however, the amendment suggests “legislating to hold a public vote on a deal or a proposition that has commanded the support of the majority of the House of Commons”. So what does this mean in English? Well, should a deal be provided for by the collective will of the house of commons or majority position found, the public should be consulted on whether or not it wishes to accept it. To you and me, this means a second referendum on Brexit containing whatever question the House of Commons has managed to agree upon. Whatever this means to the UK, to me, to you, one thing’s clear; markets liked it, bidding the Pound up some 0.5% on the day.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 21st

B-Day!

 

 

The pun above was simply too good to miss. Musing upon its formation ahead of May’s speech before the House of Commons this afternoon its brilliance seemed surpassed only by its malleability and simplicity. Perhaps a pun on the gift giving on one’s day of birth should May’s speech have been a triumphant suggest; otherwise a patriotic reminder of the landing on the beaches of Normandy should the performance have stood the chance of changing the course of European history; upon the maturity of an unspeakable shambles, it could even be a pun on a plumbing fixture commonplace in continental Europe used to clean one’s… see Wikipedia for the rest. Despite the brilliant malleable simplicity of the pun, having watched May’s speech closely, none of the three interpretations appear appropriate!

 

 

Certainly, as is clear from the foreign exchange market, May’s deal cannot be considered a path defining moment in the future of Britain’s relationship with Europe – these events normally invite a shift of more than 0.5% in the exchange rate! Sadly, neither might it be considered a gift to parliament nor the Commons’ reaction a birthday-like reward to Mrs May! Much to the disappointment of my title, even the greatest sceptics of May’s performance this afternoon would not have condemned her words to the status of… See above.

 

 

Enough fun. What did May really offer? Well first off, to the immediate disappointment of markets, she ruled out delaying Brexit negotiations seemingly putting a lid on the market-friendly suggestion that Article 50 be delayed. Counterbalancing this disappointing news, May quickly followed up by extending Parliament’s right to have a greater say in the future UK-EU trade deal. Overwhelmingly, however, from where I’m sitting, Plan B is Plan A with its fingers crossed even tighter. As a Conservative pro-second referendum Member of Parliament stated on Twitter, “It’s like last week’s vote never happened”.

 

 

MPs and markets now have a week in order to digest the PM’s statement before voting on what will materialise as an overwhelmingly neutral motion. The Pound immediately tried to test the lower bound of today’s trading range, however, finding limited support and encouraged by the inclusion of Parliament in the final vote, the Pound rose to test and struggle to break 1.29. From the looks of things, this rate will not survive tomorrow unless something tangible is found to support the largely technical move – sell the Pound fast?

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 18th

Bah Humbug!

 

 

December’s retail sales data has disappointed expectations, encouraging a sell-off in the Pound Sterling throughout today’s trading session. Snapping a near-perfect week of gains for the domestic currency, the Pound traded at times on half of one percent weaker on an intraday basis. The headline figure of house hold goods was down some 2.3% with sales for the period of Q4 registering a 0.2% fall. From a technical perspective it is arguable that the Pound was due a correction following sharp appreciation based upon fundamental changes to the macroeconomic environment. However, it is largely undisputed that the damning picture painted by the data has generated a gradual headwind to today’s trade. The FTSE100 has rallied admirably today in the face of a weaker Pound Sterling despite the underwhelming retail performance. British Prime Minister Theresa May has a challenging weekend ahead of her before she presents her plan, or rather plans, ‘B’. Voting will not be held on May’s alternatives before the 29th January, however, make no mistake, financial positioning in the foreign exchange markets will be virtually instant as participants express their feeling about the permissibility and productivity of plans at the time of unveiling. May has held conversations with her European counterparts with limited reported concession building taking place, leaving Sterling unable to secure another winning day.

 

Discussion and Analysis by Charles Porter

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