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Monthly Archives: October 2015

Perspective on China: Growth, only child, environment, the Chinese five-year plan

30th October 2015 by | Trader's Desk | No Comments

The Chinese Communist Party (CCP) direction meets this week in camera to set the broad political and economic guidelines for the next five years, while the country is engaged in a laborious rebalance of its growth model.

These are the main questions at the heart of discussions on the five-year plan covering the period 2016-2020.

What growth target?


Yuan Growth
The second world economy is experiencing a significant slowdown in growth, which is expected to fall this year to the lowest in a quarter century. The regime had set a goal for 2015 of about 7%.
“Beijing should significantly degrade its ambitions for 2020 – the leaders could agree on a flexible annual target by 6.5%, with the possibility of revising down this figure, as long as the job market stays around current levels”, according to Nomura bank’s analysts.
President Xi Jinping recently assured that “a growth rate of around 7% would be sufficient to achieve the goal of doubling by 2020 China’s GDP compared to 2010”.
The new goal could however only be unveiled in March, after validation by the Chinese parliament.
The credibility of official statistics remains debated, and many experts predict a more pronounced economic slowdown.

What could be the “new normality”?

Beijing assumes “the new normality” of slower growth, which is the result of its efforts to rebalance its economic model in favour of domestic consumption and the service sector, while reorganizing the huge state sector.
These guidelines, endorsed the end of 2013, should be confirmed at the meeting.
The five-year plan should further increase the share of services in GDP, which already grew from 44% to over 51% between 2010 and 2015 and confirmed the goal of doubling household incomes between 2010 and 2020.

Towards made “by” China?

Chinese manufactured exports are struggling, because of a mixed international situation but also by increased competition. There is also high inflation on the cost of Chinese hand force.
In this context, Beijing openly calls for an upgrade of the Chinese industry to the electronic and new technologies.

What about financial reforms?

Liberalizing furthermore the financial sector reform is also highly expected, especially on the convertibility of the yuan, with the possibility of cancelling controls on capital movements in 2020. Finally, further opening of financial activities with foreign institutions and the private sector could be considered.

Cleaning up without coal?

China Pollution Tourism

Pollution of air is a sensitive subject for China’s opinion, and important decisions should be taken.
Another problem is about coal, highly polluting, which still represents about 70% of China’s energy mix, in the absence of other sources of energy in sufficient quantities, and despite a nuclear fleet in full extension.
China has also committed to a peak in emissions in 2030.

End of one-child policy?

Already eased two years ago, official experts have recently called to urgently allow all couples to have two children in order to slow down the aging population and the alarming gender imbalance.
Since late 2013, the Chinese can have two children if one parent is an only child.

UK and China recently engaged

Uk and China agreeing
President Xi visited the UK a few weeks ago and agreed up to £40 billion deals. These deals will create around 30.000 jobs in the country. UK and China commit to building a global comprehensive strategic partnership for the 21st Century. The two sides recognise the global significance and strategic importance of stronger UK-China relations in promoting global peace, stability and prosperity. Both sides reiterate that they are determined to support each other’s prosperity and development and to work together for the benefit of global peace, security and development.
 


 



European Central Bank vs Federal Reserve

27th October 2015 by | Trader's Desk | No Comments

YellenAndDraghi
Two of the largest economies are facing the biggest decisions of 2015, one preparing to ease monetary policy further, one preparing to tighten monetary policy, but what is the final factor and who will react?

The European Central Bank’s Mario Draghi in his press conference has almost guaranteed a second wave of stimulus for the Euro area in December of this year. December is also the next potential meeting that Fed Chair Yellen could raise interest rates in the US for the first time since 2006. We’ve known for a while, 2 of the world’s largest central banks are pulling monetary policy in opposing directions, however acting in the same month could send EURUSD to a new low.

December, historically a low volatility month, could potentially have the 2 biggest policy changing decisions of 2015 to end the year with a bang for the various financial markets.

A summary of what we know

  • Low Oil prices and EURUSD trading around 1.1700 (high of 6month range) counteracts the European Central Bank’s stimulus program
  • Pressure and volatility surrounding China and the already strong dollar has delayed the Fed hiking already

What’s happened recently?

  • After the dovish September FED meeting, EURUSD traded near the high of its 6month range, threatening European inflation making exports more expensive.
  • After ECB QE2 announcement, EURUSD traded to a 2 month low, making the dollar stronger and could influence the Fed’s thinking on monetary policy to delay further.
  • Global equities have continued to rally, oil prices have dropped to below $50 a barrel.

What are the possible outcomes?

  1. The Fed hike in December
  2. The Fed don’t hike in 2015, due to a strong dollar, push back forecasts, sending EURUSD higher, forcing the ECB to act.
  3. ECB ease further in December
  4. ECB cap euro strength after a Fed hike by cutting the deposit rate further
  5. The continued rally in global equity markets gives the Fed a cover to hike rates

eurVSusd
The outcome either way will be a split in transatlantic policy or a united extension of “easy money”.

EURUSD currently trading around 1.1050, with a latest Fed meeting schedule for released tomorrow at 6:00pm UK time.

 
 


 



Technical and Fundamental view of the Aussie

20th October 2015 by | Trader's Desk | No Comments

aussie_dollarThe uncertainty surrounding the monetary policy of the world central banks has seen the Aussie (Australian Dollar) rally in the last couple of weeks. The Federal Reserve remains to hold rates, The EU and Japan have undertaken further QE and the Bank of England has eased monetary policy, increasing the demand for the commodity currencies.

A statement from RBS highlights the fears the global economy face surrounding ‘QE Infinity’, an ‘open-ended’ easing program which has no set size and duration. The recent GDP print from China was also favorable to Australia, better than expected at 6.9% with a 6.8% forecast (although a miss on the 7.0% target).

Aussie_captureOn the swing side, this flow of money into Australia is causing an appreciation in the AUDUSD which is detrimental to the already sluggish Australian economy. An appreciation in their currency is causing a decrease in demand for manufacturing, education and tourism, the 3 standalone lights in a stagnating economy (outside mining). Continuing strengthening of the AUDUSD would increase the chance of a rate cut at the next meeting. 3,10 and 20 year government bonds have slipped, increasing demand and the chance of a rate hike currently stands at 28%.

At the October 6th meeting it was announced that the economy is ‘stabilizing in markets outside mining’ and that ‘’the Bank had not changed its view of the economy significantly, and arguably it now had greater confidence in the continuing moderate expansion of the economy with the removal of the qualifier “most of” when describing information suggesting a moderate expansion.”
Technically I see AUDUSD trading to 0.7614 in the medium term. If this was to happen quickly, a cut could become far more likely and so a sharp and hard pullback could be seen should this occur. Levels to watch on the way up are 0.7420-50 and 0.7580.

 


 



Is the European Central Bank QE Working?

13th October 2015 by | News | No Comments

Mario Draghi

European Central Bank QE Program

Current appreciation in EUR/USD and continued weakness in Oil prices are battling against the ECB’s bond buying program, creating pressure on the ECB’s Mario Draghi to “do more” in order to boost the Eurozone recovery.
The next ECB press conference is scheduled to take place October 22nd, since the September meeting, Mario Draghi and other ECB governing council members have reiterated their willingness to expand QE in an attempt to stimulate the economy further, however EURUSD trades near the high of its range around 1.1350

Will we see parity?

The EURUSD QE decline which saw levels as low as 1.0463 had banks lowering forecasts to below parity, however the past 6 months range between 1.05 and 1.15 has reduced the majority of year end forecasts around 1.08 which would continue to battle against the current stimulus program and doesn’t include any further action from the ECB.

What can they do?

Mario Draghi is running out of options, in the build up to the initial release of the QE program, it was the “talk” that started the decline of the euro which enabled the European Central Bank QE to effectively purchase government bonds. We could see a similar tactic deployed again by the ECB in the October meeting, talking the Euro exchange rate down by continuing to warn “further action” through expansion and extending the current QE stimulus.

 


 



What would Brexit mean for the UK’s economic future?

12th October 2015 by | News | No Comments

UKIP want a referendum this year but the conservatives are persistent they want to hold on until 2017. New steering groups have been set up to direct this movement with ‘in’ and ‘out’ groups vying for support. Open Europe have stated that if the UK leave the Eurozone there are 2 potential stances they can adopt, Protectionism or Liberalism, the result creating a fall in GDP of 2.2% or a rise in 1.6% respectively by 2030. Protectionism would mean the departure from free trade and would encourage the growth of domestic industries- potentially verging towards a more labour than tori approach, whereas the complete opposite is encouraged with liberalism. With the conservatives in office until 2020 and the EU referendum 2017 the initial response could see focus on new trade links and encouragement of continued high levels of FDI.

In

Much of the investment into the UK from the likes of China, the US and India has been in part explained to the fact that UK is a gateway into Europe and an exit would close this gateway, with the taxes and duties advantage no longer present. Uncertainty is something business’ do not look favorably at and in the lead up to the referendum decision, Investment may be postponed or diverted. In the longer term, UK MNC’s may move production elsewhere as the competitive advantage from free trade between countries would no longer exist. Moving from the UK into the Eurozone would allow for savings in financial accounting and compliance and when combined with lower operating costs and taxes could be enough to sway the MNC’s to vacate.

Out (Brexit)

brexit

 

On the other side of the table are those who believe that now is the correct time for Brexit to take place. Some believe that the fear of a substantial decrease in trade between the UK and Europe is hugely over exaggerated as the benefits to trade of being in the EU from a cost perspective, are miniscule (custom duty is 1.76%). Britain is strong enough to survive outside the EU and can easily follow in the footsteps of the likes of Norway and Switzerland who have successfully moved away from the Eurozone and continued to trade strongly with them and the rest of the world. Many fear that FDI will decrease but in a recent survey by Ernst and Young it was shown that the top 3 reasons for investing into the UK was UK culture and values, English language and telecommunications infrastructure, no mention of Eurozone membership. EU membership costs the UK billions of pounds in lost jobs as a consequence of excessive regulation, red tape and significant membership and aid contributions.

 

Conclusion: So What does Brexit mean for UK

The 2 steering groups are in the forefront of the press at the moment. Both have substantial business experience with their highly reputable members who will be doing all they can to sway the views of the British public when they come to vote in 2017. The fallout of Greece, should it occur, would be a big contributor should home citizens feel the effect, but for now it remains down to the steering groups and there success in campaigning.

 


 



Live from trader’s desk $USDX – 08.10.15

8th October 2015 by | Trader's Desk | No Comments

I stay fundamentally long on the dollar index. I just bought this ascending trendline, and that could potentially be a good spot to anticipate a break-out of the triangle.

Raphael Daune.
0

 


 



Equities markets : which events could fuel a new real bullish dynamic?

1st October 2015 by | News | No Comments

Equities markets have been particularly volatile during the third quarter of 2015. Let’s think about the

different scenarios that could help investors regain confidence.

It will not have escaped anyone that the economic environment has deteriorated in the third quarter of

2015. Despite the temporary resolution of the “Greek case”, China has given many signs of slowdown in

industrial activity, leading to doubts about future growth of the world economy. These doubts have

been transmitted to the US Fed, which did not dare to climb its key rates on September 17 as it was

previously planned.

Several major European Equities indices are back to a level close to that which was theirs early in the

year, and the S&P500 is slightly in negative territory.

 

euro stoxx

In this context, two views are opposed. For some, the Equities markets are entering a downward cycle.

For others, this pessimism is excessive as central banks still have a few levers available to reassure

investors if it becomes necessary.

S&P500 2015

An American QE4?

There is still an existing possibility that the FED doesn’t hike its rate in 2015, and even establish a new

program of monetary easing (QE4) after the previous three already conducted since 2008 in the United

States. The introduction of each of these plans has led to a major bullish cycle for Equities markets.

SP500 QE

The option is still considered very unlikely though, while a majority of FOMC members at the last

meeting were still anticipating an increase this year.

Other solutions could be planned however with much better odds.

A bounce in Commodities?

A global rebound in Commodities would give a breath of fresh air to many emerging countries whose

economies are closely linked to this sector. Equities markets would definitely benefit from a rebound in

this business area. A rebound in energy prices would impact positively inflation and also allow the Fed to

provide more visibility on the pace of rate hikes.

Additional measures from the ECB

One last surprise could come from the last decisions of the European Central Bank. Mario Draghi has

made a habit of surprising the markets since his arrival, thus, the ECB might surprise by announcing new

easing measures or increase and/or extend significantly the current ones.

ECB QE

It is apparently too early to bet on this kind of reinforcement of the latest measures and a period of

observation of the evolving of the economic conditions is required. But Equities markets could receive

some good news at the end of the fourth quarter and this is something we definitely have to monitor in

the next ECB statements.

On a personal point of view, I remain bullish on Equities markets, as I don’t see a systemic risk at the

moment that could trigger a deeper correction from the current levels. The earnings season is starting

soon and it will probably a clearer view on the shape of the economy. Last but not least, investors have

been talking (with fear) about that US rate hike since quite two years now, so this might not come as a

big surprise whether it happens next month or within three months. A rate hike should also been seen

as a good sign that the economy is on its way to recovery, not as a huge catastrophe.

Finally, a real crash will also most likely to happen when nobody expects it. Now, so many people are

expecting a bear market that I anticipate a short squeeze before any real bear Equities markets

materialize. If the S&P500 can hold the 1800-1850 support and reverse until at least 2010, it will trigger

many stops from short traders who might even reverse their positions.

S&P500 prediction