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Why the ECB hardly revive the European Economy

4th December 2015 by | News | No Comments

This Thursday, December 3, the economic world was watching Frankfurt (Germany). The European Central Bank was indeed supposed to announce new measures against the low inflation and sluggish growth in the Eurozone. It’s a fight that it has led for months. And that raises a key question: why all the measures taken launched by the monetary institution are so slow to produce effect so far?

First, we must remember that the mandate of the ECB is to stabilize price developments around the target of 2% – a rate considered synonymous with good health of the economy. But to achieve it, it has set a series of interim targets, like the revival of bank credit. To which were added during the crisis, “informal” objectives, such as the depreciation of the euro … For what results? Some of these measures have proven very effective, while others are a huge failure… Here’s why:

“QE”, negative deposit rate: tools increasingly audacious

That was a very long time ago when the main tool of the ECB was limited to determining its policy rate – that is to say the cost of money … Once this one was down near the minimum (0.05%), the institution has invented new weapons to act on the economy.

The last and most massive of them is the quantitative easing program announced in January 2015 which began two months later. It consists of purchases of public and private debt markets, initially set at 60 billion euros a month, until September 2016″. To do so, the ECB injects newly created money into the financial system in the hope that it will reach, ultimately, to households and businesses. Unfortunately, the ECB probably launched its QE too late, which limits the effectiveness. The US Federal Reserve began his program in 2008 and the Bank of England in 2009…

Another weapon is the deposit rate negative, set at – 0.10% in June 2014 and to – 0,20% in September of the same year. It is equivalent to tax banks for cash they let sleep in the safes of the ECB, and would encourage them to lend this money to businesses. But in fact, the negative deposit rate especially discourages foreign cash to settle within the monetary union. Such an influx would effectively push up the euro, precisely what Mario Draghi seeks to avoid.

The weak euro helps companies

Since March 2014, the euro, now at 1,0850 dollar has lost roughly 20% against the greenback. Although in theory it is not within its mandate, the weak euro is indeed one of the unofficial goals of the institute in Frankfurt. It forces up the price of imported goods and thus, revives inflation. At least in theory. Unfortunately for the ECB, these inflationary effects are yet offset by the sharp decline in oil prices.

Another effect is that the weak euro favours the competitiveness of European exporters who sell their products cheaper on international markets, and therefore, the activity picks up. On this point, economists believe that the strategy of the ECB is a success.

eurusd-daily-chart

Falling interest rates benefit the states and households

This is probably the greatest achievement of the institution chaired by Draghi. In 2012, rates on 10 years’ government bonds in Greece, Portugal or Spain took off up to 37%, 15% and 7%. We all remember then Draghi saying that he will do “whatever it takes to save the euro,” by creating a first and a second public debt buyback program. The head of the Central bank has completely extinguished the debt crisis.

Spanish or Portuguese government borrowing rates have even now fallen below the 3% mark. Thanks to this, these countries were able to stabilize their public finances and resume growth.

The fight against inflation low is a failure

However, the ECB has so far failed to achieve its primary goal: to stabilize inflation around 2%. In October, inflation stood at + 0.1%. Excluding the most volatile prices such as energy, it nevertheless was + 1.1%.

Inflation-Eurozone

Of course, the ECB is not responsible for some causes of low inflation. Weakness of wages, high unemployment rate (10.7% in the euro area), competition from low cost countries… Monetary policy might have become ineffective against low inflation. Let’s hope that this low inflation doesn’t transform into deflation, thereby engaging in a negative spiral, which will finally block the entire economy.

Unemployment Eurozone

The Eurozone growth remains anaemic

Apart from inflation, the ECB action also aims to reinvigorate European growth. But again, results are not awesome. The monetary union’s GDP is slowing: it grew by only 0.3% in the third quarter, against 0.4% in the second and 0.5% in the first … On its own, the ECB seems unable to restore growth, States are also expected to do their share of work.

eurozone-growth

If European activity is slipping, this is also partially due to external factors such as the slowdown in emerging countries. But there are also internal factors, like the lack of ambitious reforms to boost activity, or low investment made by countries which have the power to do more, like Germany… Meanwhile, the liquidity injected by the ECB continues to fuel the rise of financial markets. At the risk of creating, ultimately, potentially devastating bubbles …

Is it about to or has it already happened? Federal Reserve loss of credibility

25th November 2015 by | News | No Comments

yellen

As we know, December is the favoured month the Federal Reserve begins lift off and hikes interest rates for the first time since 2006, unless an unprecedented catastrophe in the employment figures occurs. If the Fed postpone hiking again, they will lose credibility for sure, but has this already happened?
The arguments for the Fed to hike the Federal Funds Rate outweigh all other moves in monetary policy movements, however markets have already priced in an initial hike and nothing further or reversal and cut rates soon after the first hike.

Why?

Economic growth is the US is still low, yes the unemployment rate at jobs market is back on track and improving. Nonetheless a “lower for longer” policy leads to a substantial amount of debt build up in the economy. If total debt is 300% of GDP across the economy, an interest base rate at 1% would use 100% of GDP to service it, therefore already capping the Fed on further rate hikes after the liftoff. Essentially this means the economy can’t handle a higher interest rate with the current levels of debt in the economy.

What does this mean for the Federal Reserve?

If the Federal Reserve hike and cut, they will lose all credibility instantly. Some would argue this has already happened. The September meeting was favoured the 2015 month for liftoff, however the meeting concluded the Fed was looking at market conditions, raised its international awareness and the effects of the China slowdown, but in the previous minutes from the last meeting there was no mention of this and the sentences were dropped suggesting the Fed is stalling.

Market Reactions

The markets aren’t currently pricing in a sustained hike, or further hikes from the Fed due to nature of the level of debt and the lack of economic growth.
This is evident in the bond markets with the yield curve flattening quickly. If we look at the 3M Eurodollar futures quotes, the March 2016/2017 contracts spread is a just over 60 basis points, suggesting maybe 2 hikes next year and that’s it from the Fed. It’s very apparent the bond and futures markets don’t believe the Fed can hike and sustain at that level.

EURUSD currently trading at 1.0636

USDJPY currently trading at 123.05

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.

End of the Year Rallies – Equities Indexes & The Bund in review

13th November 2015 by | Trader's Desk | No Comments

Now is the time to make previsions for the end of the year and I will here detail my

views on the major Equities Indexes and on the Bund.

The ECB’s President, Mr Mario Draghi, has already paved the way for a bullish end of

the year with his latest statements about a possible QE extension. The volatility has

also dipped sharply since the August decline, mainly due to China’s woes. Finally, the

bigger timeframes still look incredibly bullish and I won’t be the one to fight such

trends, whether in Equities or Bund.

ES long term

The S&P500 December 2015 Future has retraced recently from 2110 to a very

interesting level of 2065-2070 and I am long from here, and will eventually add to the

position at around 2050. My fist target will be 2090 and then a new all-time high at

around 2125.

ES 240

I assume that traders will keep on supporting the DAX on dips and suspect that they

will see the 10.700 – 10.900 range as an ideal region to add to long positions. The DAX

index could even drop lower, to 10.550-10.600 without altering the trend. I am

personally building a long position from the 10.750 area, and will add at 10.650 if we

reach that level.

DAX 60M

In the longer run and with better data coming out of the U.S. such as wage growth

reaching a 6 year high by increasing 2.5% year on year, the likelihood of stock markets

globally remaining upbeat rises. If it is the case that the market reaches and breaks the

top of the descending trendline at 11.150, there will not be any major technical

resistance level until we reach first the July high of around 11.800, and probably later

print a new all-time high above 12.500.

Dax long term

A push higher at this time of the year is also consistent with seasonality as traders get

in line to take advantage of the Christmas rally effect. The biggest risk we can see

ahead of us is a Fed rate hike. The first rate hike tends to cause a pullback in equity

markets and the market also tends to be shaky on fear of what that first rate hike may

bring. But, in the end, a rate hike is the sign that the economy is recovering well and

shouldn’t be seen as the end of the world, especially if the pace of rate hikes remains

very slow in the next few years, as I think it will be.

Finally, regarding the Bund, the 10 years Yield has reached yesterday an interesting

level at 0.7% and I have shorted that trendline you can see in the graph (so long Bund

at around 155.25).

10 year German Yield screenshot

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I am expecting the yield to go back towards the 0% level, due to QE extension (and

Bund December 2015 Future contract to retest 159 and 160 my next targets).

Bund long term

Happy Trading!

Federal Reserve: Will Yellen Finally Hike in 2015?

9th November 2015 by | News | No Comments

2015 has so far very much been the year the Federal Reserve could liftoff and be the first major Central Bank to raise interest rates.

Why?

The US jobs market has grown rapidly, with monthly jobs created above pre 2008 crisis levels and still rising. Throughout the months of September and October, markets saw a slowdown in jobs created, however Novembers numbers beat all estimates with 271,000 jobs created and upward revisions on previous months figures. The US unemployment rate has dropped to 7 year low at 5% and markets saw an uptick in average hourly earnings.
After the latest release of economic data, estimates for a December rate jumped. In October, the chance of a December hike was around 20% – 30%, now analysts and markets are estimating a 70% chance of a rate hike from the Federal Reserve in December and 73% in January, as shown in the Fed Funds Futures.

jobs report paves path to December hike

What’s missing?

The jobs market is strong, unemployment is low and with average earnings is picking up, meaning core inflation in the US should start to rise as well.
However the Federal Reserve still has concerns that could lead them to not hike in December and keep rates lower for longer.
The main problem being the strength of the US Dollar across all currencies except those that are pegged. This is along with the low prices of oil is dampening inflation in the US, making inflation virtually non-existent.
At the current pace of the US economy inflation will pick up, even with the strong dollar. The dollar can get stronger, especially with the ECB across the pond potentially expanding their current QE program, which the markets expect to find out the verdict from Mario Draghi in December also. So it’s vital the Federal Reserve are prepared to hike before inflation has the chance to spiral out of control.

The hiking cycle

There are 2 rates at which the Fed could hike rates, fast and aggressive or slower and longer. At the current rate, the factors for and against a hike require two different cycles of interest rate hikes.
The current jobs market and strong NFP numbers could require an aggressive rate hiking cycle. On the opposite side, the strength of the dollar and low levels of inflation requires smaller rate rises as so not to suppress inflation and increase the strength of the US Dollar further.
What the Fed mustn’t do, hike too soon before the economy is ready, forcing them to cut rates soon after having an immediate negative impact on the economy. Janet Yellen has always been on the “lower for longer” side of interest rates. The US economy is ready for a rate hike, however it’s asking a lot of the Fed to hike before the Christmas holidays, meaning if December isn’t the month for liftoff, January is almost certain if the economy carries on improving at the current pace.
If the Fed don’t hike in December, 2015 will be known as the year the Fed talked about raising interest rates, and didn’t.

The next Fed meeting is on the 16th December
EURUSD currently trading at 1.0770

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.

 


 



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

 


 



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

 


 



Oil Commodity Downside Pressure

29th September 2015 by | News | No Comments
Oil Downside Pressure Rises

Both fundamentally and technically a big week for the oil markets. Commodity crisis set to continue as VW Scandal continues to unfold, Royal Dutch Shell and other Russian energy giants cease and delay offshore drilling, ECB inflation expectations turn negative, US Federal Reserve interest rate lift-off speculations and crude oil inventories data release.

Volkswagen Emissions Scandal

As the Volkswagen emissions scandal continues to unfold, econonmists and analysts are expecting a further knock on effect to the diesel markets. European refineries could be forced to switch back to boosting gasoline output and reducing diesel production and imports from Russia, the U.S. and Middle East Refineries. Gasoil futures continue to fall whilst Gasoil inventories continue to rise, putting pressure on the suppy and demand curve making a move lower in oil prices more likely.

Gasoil futures

 

Chinese Demand Knock-on Effects

Oil prices slid on Monday after china reported a drop in industrial profits from a potential weakening in demand by the world’s second largest consumer. The continuing decline in commodity prices has taken it’s toll on Glencore PLC, dropping almost 30% on the announcement from it’s CEO, the biggest decline since the company went public.

glencore plc

Glencore plc record drop

 

Energy Giants

Current oil prices remaining below $50 a barrel have contributed to energy giant, Royal Dutch Shell ceasing artic drilling operations due to fact it’s “not worth” the current price. Russian energy giants Rosneft OJSC and Gazprom have delayed offshore drilling by 2-3 eyars because of similar reasons to Shell and Russia’s roled in the Ukraine Crisis.

Central Banks

The US Federal Reserve’s potentially 2015 liftoff in federal funds base rate hikes will have further downside pressure on the oil prices. Whereas across the pond, the current level and decline in oil prices is surpressing UK and Eurozone inflation. UK inflation has already entered a period of deflation, with the ECB’s Draghi expecting Eurozone Inflation to turn negative in the coming months, counteracting the stimulus programme potentially forcing the ECB to “act” further. Next data release is 30th September.

Mario Draghi Janet Yellen

Downside Risk

Crude oil inventories data expected to be released Wednesday 30th Septemeber, an increase in inventories could see a move lower in oil price. With added pressures from the Federal Reserve, China and energy giants around the globe, further depreication in the price of oil is likely. Light crude trading at the low it’s range between $44.00 and $48.00 a barrel, brent crude trading similarly at the low of it’s range between $47.50 and $50 dollars a barell. A move through the low of the range could see light crude trading near the low of $40 and brent crude trading near the $45 a barrel levels.

light crude and brent crude

 

Charts via Bloomberg

GasOil Futures

Glencore record drop
 


 



What now for Greece – Tsipras and the ‘Extend & Pretend’ loan

23rd September 2015 by | News | No Comments

Tsipras held onto his position of Greek prime minister after defeating his main opponent Memorakis at the snap election on Sunday September 20. Greek voters-1.6 million fewer than earlier in 2015- voted in support of Tsipras’ and his Syriza party’s plans who, after a drastic u-turn are now pro austerity and have accepted the Troikas bail out plans. Does this mean Greece are now on course for recovery and a Greek exit unlikely?

Europe has been somewhat distracted with the Syrian immigration crisis and talks of a ‘brexit’ have put Greece and it’s bailout programme somewhat off the radar. Significant problems remain and when analysing the terms of the bailout it seems the successful appointment of Tsipras has removed only 1 set of risks facing Greek return to economic growth. The agreement signed in August is up for review in November and there are 4 key areas which still haven’t been reformed.

1: Pension reform is a major worry for Tsipras and is likely to cause the most upset amongst Greek population.
2: The IMF want a bigger recapitalisation of banks than Greece has planned for to protect the downside future risks.
3: Although there has been an increase in the tax bill they are still 11.9% below the target and current levels of government spending are unattainable in the long run
4: The IMF want ‘explicit and concrete debt relief from other official creditors’ before they will release their bailout funding.

When these factors are combined with the significantly harsh austerity measures already in place- small business’ must pre pay tax on forecasted 2016 profits, households must pay taxes on non performing apartments and shops, VAT hikes and pension cuts (potentially Merkels influence) to name a few- it is clear to see that the Greek people are the ones taking the brunt of the bailout.

So why was Tsipras reinstated? The main reason is seen to be that he was most likely to stick to and implement his 3 pledges plan. He pledged to combat the following key areas:
1. Further negotiations with the Troika- the deal isn’t over and set in stone yet however the agreement that ‘the Greek government must agree with Troika on all actions relevant for the achievement of the objectives of the memorandum of understanding’ suggests bartering room is small
2. Debt relief will come soon- less austerity will come and boost demand of investors. A harsh austerity of 3.5% of GDP by 2018 has already been signed, again suggesting that a promise of lightening austerity is questionable.
3. Deal with the oligarchs- the Greek oligarchs are seemingly in bed with the troika and during 2015 were using their media channels and political agents to highlight this support. Turning against the oligarchs has now been made more complicated with the disbanding of the SDOE so again Tsipras may have to find an alternative solution.

It is clear that Greece are still in substantial difficulty. The bailout currently stands at approximately €86bn and could easily get bigger. Is Tsipras the man to find a solution with his hands seemingly tied? I fear not.

 


 



Will the FED raise rates?

17th September 2015 by | News | No Comments

Thursday 17th September brings another FOMC statement from the US, the first meeting since the financial crisis in 2006 in which the chance of a rate rise is a true possibility. Janet Yellens language at the recent FOMC meetings has gradually become more hawkish, evolving from ‘Considerable time’ to ‘Patience’ to ‘Not impatient’ and at the most recent meeting has stated that the US economy is ‘Nearly balanced’ suggesting an increased likelihood of a hike.  Futures have the probability of a rate increase at 36% up from 26% suggesting that recent economic releases are leading the US into a period requiring higher rates.

The price of oil is potentially keeping inflation artificially low and a strong dollar is compounding this effect due to The US’s import driven economy.  The US employment rate is low and has continued to stay low for a sustained period of time and as a consequence inflation will begin to rise at some point. Sustained low inflation would allow the US to be more patient with there interest rate decision and problems within the emerging markets would compliment this more dovish approach. If ‘lift off’ is activated due to a ‘balanced’ economy a rate increase of 0.125 per cent is expected with a cautious Fed raising interest rates steadily to a more ‘normal’ level in the region of 2-3 per cent by 2017.

Written by Henry Green – LTG Fundamental Analyst