London Trading Group

London's Leading Trading Academy

Register now to get access to your free content.

No experience needed. We only show you what works.


All posts by Henry Green

Economic Effect of Most Recent Terror Attack

18th November 2015 by | News | No Comments

London-Bridge

After the shocking atrocities in Paris on Friday evening, tensions across Europe are at an all-time high, with further attacks from ISIS seemingly imminent. The total cost of terrorism in the Uk stands at £52.9bn up 60% from 2014 and they now rank 28th on the terrorist incident list from 128 countries in Europe. So how did the markets respond and why did they respond in such a way?

Market’s respond

Both the Cac40 and the FTSE 100 opened lower but recovered well with the 2 indexes closing 0.1% and 1% lower respectively. Airlines, tourism and travel companies were hit the hardest with IAG down 3% and Air France KLM down 6%, but these were offset by positive moves in security and defence companies. The initial move was towards oil and gold which both significantly rallied but then fell 3% into the evening trading session, something that wouldn’t have happened should the markets have believed the economic impact was critical. So why was there no panic in the markets?

  1. The markets had been struggling all week and further downside potential was limited.
  2. In terms of the impact of this terrorist attack, the economic effects aren’t that severe with the only areas potentially affected being consumption and manufacturing- something that will be explored later
  3. The ECB are more likely to become accommodative to the struggling European countries.
  4. Unfortunately, people are becoming emotionally weathered by such events and with the danger constantly talked and written about in the press, people almost price in an attack of some kind. This however wasn’t the first one in very small space of time and should attacks continue the effect will certainly become more pronounced.
Terror’s effect on Retail & Manufacturing

Retail and Manufacturing are the 2 main areas which could see declines due to the most recent terrorist attacks. It is likely that people will stay away from busy central locations and thus a decline in consumption will be seen however this is believed to be postponed and not abandoned- any losses seen will be neutralized by increases in coming months. Manufacturing may also record poorer numbers as questions over Europe’s Schengen Zone have resulted in tighter border controls around Europe (1 ISIS terrorist suspected to have passed from Greece) will make transportation of components and finished goods slower and therefore more expensive.

The main funding source of ISIS is the oil fields in Syria with expected income $1.5m a day, with oil sold equivalently on the black market within ISIS controlled states. The new strategy employed by those standing up to this threat, is the bombing of the transportation lorries and the fields themselves to try and stop the funding at source- will this affect the price of oil? Although fundamental to the maintenance of ISIS, the amount of oil they control is negligible in the grand scheme of things. They currently export 40,000 barrels a day, which is nothing in comparison to the current production of oil- Global supply of oil exceeds demand by over 900000 barrels a day. The last time a serious event caused a spike in oil was during the overthrow of Qaddafi during the Libyan revolution in 2011 in which over a million barrels a day were knocked off total oil production.

It is clear that the economic effect is one that pales in significance compared to the psychological and emotional effect. People are undoubtedly cautious particularly in Europe but also across the world. Political policy is questioned in such times and the French National Front (3 weeks to vote) and the Spanish Podemos party (1 month to vote) are gaining significant ground. Should there be continued attacks, the effects may however become far more significant.

New Zealand braces for ‘El Nino’

4th November 2015 by | News | No Comments

A significant threat to the New Zealand economy and particularly the value of its currency, is the so called ‘El Nino’, the weather event which happens every 3-6 years in which temperatures fluctuate rapidly, hugely increasing the chance of drought. This year brings an El Nino weather event that is expected to be the worst since 1998 and could consequently send New Zealand into a drought inspired recession.

How will El Nino effect New Zealand Agriculture

new zealand agriculture
With a 15% decrease in the yield of wheat in Australia, cyclone season arriving quickly and droughts already present in Papua New Guinea, Vanuatu and Ethiopia, New Zealand face a tough season with ground temperatures expected to reach record levels. Areas such as Canterbury and Wariapa are already struggling and should the weather event be as bad as forecast the dairy production of NZ could suffer substantially. The lack of rain water increases farming costs, reduces the gross value of add on products and increases the mortality rate of livestock, resulting in an increase in price and a decrease in supply for New Zealand dairy products. Should this event be as bad as expected the chances of a further interest rate cut by the RNBZ is significantly more probable.

El Nino’s effect on the currency

Daily turnover of the New Zealand dollar is $105bn as it attracts a significant volume of ‘Hot Money’. This daily turnover is 56% of GDP and leaves the Kiwi very exposed to the value of its currency. The NZDUSD is up 5.8% this month, reacting positively to Chinas abolition of its ‘1 child policy’ and successive stronger GDT auctions. This vast fluctuation makes it difficult for companies to hedge their currency risk (The majority of M&Cs in New Zealand are foreign firms) and makes it difficult for the central bank to set the correct monetary policy. There are issues currently with inflation and slow growth and this strong $NZD is certainly not helping matters.
Having cut 3 times since June, further easing of monetary policy, when the above factors are taken into account, seems highly probable. Governor Wheeler was less dovish in the October meeting than he was

new zealand reserve bank
in September but the risks remain ever present and only time will tell. Lloyds see stabalisation of the NZDUSD around 0.65 but should The Fed increase their rate in December and weather conditions/inflation/growth become any worse, the downside to the NZDUSD will be huge. NZDUSD currently trades at 0.6630.

 


 



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.

 


 



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.

 


 



Slowdown in Chinese Economy

30th September 2015 by | News | No Comments

Janet Yellen’s unwillingness to raise interest rates in her September decision brought to light the fragility and dependency of the United States’ economy with China. She invoked 16 times during her speech that problems in China had the potential to drag down US growth and until she felt comfortable with the downside risks of such a drag, would leave rates unchanged. Christian Lagarde, chair of the IMF compounded the effects of Yellens ‘hold’ interest rate decision after stating that the IMF is ‘worried’ about the spillover effect from the problems the Chinese economy is facing. The effects of the Chinese slowdown are clearly influential on the world’s economies but how serious is this problem and what can they do to recover from it.

China GDP
The Chinese stock market collapse in June earlier this year has seen the market down 40% from its peak. This has spooked many investors and has come at a time when monetary and fiscal policy currently employed was seen as supportive- this serving only to exaggerate its impact. Manufacturing decreased in the period of July-September, the Renminbi was devalued in August and the debt to GDP ratio has reached 250%.

Issues with Monetary Policy and the Real Estate sector within Chinese Economy

The slowdown in the Chinese economy has been significantly influenced by their strangling monetary control and faltering Real Estate sector. After the 2008 crisis the PBOC pumped huge amounts of liquidity into the economy which ran into the Real Estate and Shadow banking systems. With the help of a US dollar pegged currency, Chinese economy has, until recently, ran a GDP growth figure of 10%+ p/a but at the cost of a real estate sector that has huge levels of debt, leverage and now oversupply. The overproduction of raw materials has caused 30% overcapacity, triggering loan defaults and foreclosures in the commercial, residential and industrial property sectors. These factors are causing firm closures, decreasing FDI and a reduction in GDP. Keynesian economics suggests plenty of ‘outs’ of economic downturn by strict government intervention but this could reveal floors in the communist regime and would consequently never be explored.

china inventory

Is there a resolution?

In order to tackle these ever growing problems China need to focus on their 3 ‘Mache’- Investment in Infrastructure, Exports and Domestic consumption. The first 2 can be tackled by government policy but a nation of savers creates difficulty when trying to increase domestic consumption. Many argue that China’s focus is now on quality and not quantity and that ‘market perceptions are more divorced than ever’. Chinese economy have huge levels of bank assets(10x GDP) allowing their survival of this downturn in the short/medium term, but serious reform and strict monetary policy Is required to combat the many fundamental floors of their economic system and I have only scratched the surface.

Many argue that China’s focus is now on quality and not quantity and that ‘market perceptions are more divorced than ever’. China have huge levels of bank assets(10x GDP) allowing their survival of this downturn in the short/medium term, but serious reform and strict monetary policy Is required to combat the many fundamental floors of their economic system and I have only scratched the surface.

china economy estimated capital flow