The Pound sinks after the Parliament vote on May’s Brexit ‘Plan B’

The Pound experienced another nightmare night on January 29, sinking against the US dollar and the euro, during the debate of the British Parliament on ‘Plan B’ submitted by Prime Minister Theresa May, after the rejection of her ‘Plan A’ agreed with the European Union at the end of November. Investors have begun massively to sell the British currency as the sequence of amendment votes hinted how the Parliament would have given the green light to the possibility of modifying the Brexit agreement.

The Pound collapsed just after the outcome of the vote on the amendment submitted by the Labour MP Yvette Cooper, the one intended to discuss an extension to the official Brexit date (March 29). The rejection of the amendment was not a foregone conclusion, since many financial operators had begun to bet, in recent days, on a possible agreement between majority and opposition to lengthen the date, in an attempt to rewrite another agreement. The rejection, according to many analysts, increases the risks of a no-deal, despite the Parliament has expressed itself contrary to this option.

Finally, British MPs voted in favor of the possibility of modifying the backstop mechanism that regulates the Northern Irish border. Immediately after the vote, a spokesman for the European Commission said that Europe is ready to discuss an extension to the official date but not to renegotiate the terms of the agreement, including the backstop mechanism.

The Pound has thus fallen up to 1.3058 against the dollar, 141 pips below the day’s high (1.3199) and up to 1.1419 against the euro, 134 pips below the day’s high (1.1553 ). On the ground, the British currency eventually left around -0.70% against both currencies. Yesterday, Theresa May spoke with the leader of the Labour Party, Jeremy Corbyn, while EU top officials rejected again any proposal to sit around the table in order to renegotiate the agreement. The Sterling slightly rose against the euro and the dollar, but it did not entirely cover the previous day’s losses.

Wary investors drawn to gold’s allure

If gold is anything to go by, investors are apprehensive about the state of the world. Volatile equity markets and fears of an international economic downturn have helped gold rally 10 percent from its August lows, bringing it among the strongest performing metals over that time.

It is an acute contrast too much of the previous two years, when rising US interest rates, a strong dollar and buoyant equity markets hurt gold bugs and the shares of miners such as Barrick Gold, Newmont Mining and Goldcorp.

And when there was a correction in US stocks in early 2018, the gold price did not benefit. Almost a year on, the main challenge is whether 2019 could prove a lucrative year to hold gold, which is commonly acquired as a hedge or haven by investors.

The volume of tangible gold in exchange-traded funds has risen to 71.9m ounces, close to the record high of 72mtouched in May 2018. Which, along with investors covering their speculation against gold, have helped the yellow metal’s price recover from the 18-month low of below $1,200 a troy ounce touched last August.

There are several reasons to consider why the gold price might burst through the $1,300 mark and advance higher. These include still-fragile stock markets; the assumption that the Federal Reserve will hold off from interest-rate increases this year, and a lower dollar, which makes the metal more alluring.

Rising US rates have been an impediment on gold since the metal gives no yield. Goldman Sachs, one of the most prominent banks in commodity markets, lifted its gold forecast last week and now predicts a gold price of $1,425 over the next year. And some investors expect rising concerns over US debt levels could only sharpen gold’s attraction.

The purchasing of gold by central banks is also at its highest level since 2015. As many authorities remain eager to diversify away from the dollar. However, the numerous disappointments for gold bulls over the preceding year have some wary. Gold has not transgressed the $1,300 level since June.

Is being bullish on oil is getting harder?

Brent crude completed a record-equaling streak of nine days of successive gains, so you could be excused for assuming the oil bulls are back in business after one of the roughest quarters in contemporary recollection. But you would be incorrect.

While Brent crude has ricocheted from a low beneath $50 a barrel over Christmas to go back above $60 a barrel, bullish investors in oil still appear to be in tight supply. Data for Brent suggests that hedge funds and other large speculators may have extended their net long positions last week, but the bulk of the movement appears to have been allowed for by traders closing out short positions rather than becoming more optimistic.

This is despite crude having plunged from above $86 a barrel in early October, and with several structural factors acting in the bulls’ favour.

First, the fall to below $50 a barrel was then looking like a classic overshoot. With US barrels trading at a substantial deduction to Brent because of pipeline capacity restraints, the producers that have fuelled the US shale boom were looking at an estimate in the low $30s with Brent near $50 a level that could rapidly have reduced production of the world’s preeminent source of oil supply expansion.

Second, Saudi Arabia and Russia have driven the so-called Opec+ group in another round of supply quotas to curb the price drop, commencing in January. While the true magnitude of the contraction remains to be known.

Saudi Arabia has made explicit it will do as much as feasible to avoid prices spiralling lower. Third, Iran’s oil exports have declined at the end of the year, down 60 percent since last spring to just above 1m barrels a day. That is despite the US issuing waivers to several Tehran’s clients when it re-imposed sanctions in November, a blow many traders cited that for partly triggering oil’s fourth-quarter rout.

The restoration to $60 a barrel has further been facilitated by the wider market backdrop, with stocks stabilising and the US dollar weakening, making commodities priced in the US currency cheaper. So against this backdrop, the challenge must be: why have the oil bulls been reluctant to materialize?

Traders and analysts point to two interlocking components: anxiety and a loss of conviction in crude oil’s capacity to sustain rallies in the era of US shale. The fear factor is justifiable given oil’s 40 percent slide in the fourth quarter, with many investors left bruised and battered.

The bigger longer-term consideration for the industry and those speculating on oil’s revival is just how deep those fears now run.

Shale’s performance in 2018 continues to make it less likely that prices can sustain rallies above $70 a barrel for long. Oil bulls will yet find opportunities if they are adroit, but 2019 is nevertheless looking like a grim year to be a bull.

China’s fourth-quarter GDP figure slips to 6.4% as trade war hits consumer sentiment

China’s economic growth sank to its lowest annual rate in approximately three decades last year as the US trade war and Beijing’s clampdown on a debt-fuelled corporate spending spree took their toll on Chinese businesses and consumers.

The 6.6 percent increase in the gross domestic product in 2018 was the lowest since 1990 when China was faltering from international sanctions following the Tiananmen Square massacre. It was down from 6.8 percent in 2017.

The data published last Monday also revealed the Chinese economy was proceeding to decelerate, growing just 6.4 percent in the fourth quarter, the lowest quarterly rate since the global financial crisis. Growth has now slowed for three successive quarters, prompting concern among investors that the country could drag down the global economy.

Beijing has used an array of fiscal and monetary stimulus measures since July to support investment and consumption, but the new data shows that the policies have so far failed to lift the slackening.

Despite the pessimistic forecast, financial markets across Asia took the announcement in their stride, with most significant indices ending the day flat or higher. Mainland China’s CSI 300 closed up 0.6 percent, with Hong Kong’s Hang Seng up 0.4 percent. The Topix in Tokyo was 0.6 percent higher and Sydney’s S&P/ASX 200 rose 0.2 percent.

UK pound rebounds after May’s Brexit plan was resoundingly repudiated in the commons

Britain’s currency dropped and then rebounded sharply in volatile trade following Theresa May’s heavy defeat in a House of Commons vote on her Brexit deal.

Sterling fell as low as $1.2672, down 1.5 per cent on the day, immediately after the results were read in parliament. However, it cut its losses dramatically almost immediately afterwards, leaving it flat on the day.

Sterling had been off 1.2 per cent just before the reading of the results. The historic defeat having largely been priced into the pound in the run-up to the vote. With attention already focused on Remainer efforts to fend off a ‘no deal’ scenario and extend Article 50.

The Brexit package Mrs May agreed with the EU was voted down in the Commons by 230 votes. Prompting Jeremy Corbyn, the Labour leader, to move for a vote of no confidence in the Tory government.

Why the Aussie dollar is grabbing attention

All minds are on the grinding gears of China’s economy, but for Australia, the destiny of its largest trade partner is a specific headache. Investors are examining the latest market and production numbers to ascertain the condition of the world’s second-largest economy.

The Aussie dollar, generally understood as a surrogate for Chinese expansion, bounced this month on expectations of a trade deal between Washington and Beijing, and as China proceeded to shore up its economy with stimulus measures. January’s 2.2 percent rise in the Aussie is modest contrasted with the 10 percent fall in 2018 that left it as the worst performing G10 currency against the dollar.

That leaves Australian markets as something of a litmus test for how two of the biggest economic trends since the financial crisis, the growing consequence of China and the aggregation of debt by western economies, play out in 2019. The key challenge for investors is whether the rebound so far this year in the Aussie can last, or whether the currency will be pressed further by a China slowdown.

The Royal Bank of Australia (RBA) has also long lamented its wobbly property market, asking banks to boost capital to swallow losses. But if banks do not have the capital to handle a housing shock, the RBA might have to moderate monetary conditions and cut interest rates, in a blow to the currency. Yet growth is already exhibiting symptoms of slowing. The Australian economy slowed in the three months to the end of September, growing 0.3 percent over the preceding quarter.

Weakness in consumer spending was the principal offender, dragging annual growth down from 3.4 percent to 2.8 percent in the period. That leaves the economy reliant on momentum from China where manifestations of a marked slowdown have been surfacing in recent months. China reported in mid-January a surprise fall in exports for December, marking the biggest drop in two years. Any lapse in demand for commodities casts a gloom over resource-rich Australia. That, coupled with increasing caution from the US Federal Reserve, robbing the US dollar of some momentum, is why some are anticipating a potential rebound for the Aussie.

Why 2019 won’t be a rerun for emerging markets

For most of last year an angry US bond market took the sword to emerging market assets. But now, enamoured of the Federal Reserve’s newly confessed flexibility, the hope of trade rapprochement and easing from China, many investors are wondering if, similar to 2016, policymakers have underwritten them again?

These perceptions can aid a relief rally in the near term, but is there really is enough policy fuel in the tank this time to drive structurally stronger emerging market returns?

The force that calmed the US bond market is weaker global growth which is the EM’s true pressure point. Even though it does not precipitate as dramatic sell-offs in fixed income as does a sharp rise in US rates, lacklustre growth is the reason behind the decade-long, slow burn underperformance of EM currencies and equities. This challenge is now intensifying.

Economic models show sequential EM growth had dropped to just 3.9 per cent at the end of 2018, not far from the lowest levels in the post-crisis era. Export orders for the large trading and manufacturing economies of Asia and Europe signal a coming trade recession. It is unlikely that a truce in the trade war, even if we were to see it, will prevent this.

Weak external data does not seem to be driven by higher US tariffs. As the US is the only region where import volumes have remained consistently strong. Europe meanwhile has been very weak but, largely because of declining demand from China, the real source of growth angst.

The primary drivers being policy and regulatory efforts to rein in the economy’s credit dependence, that the trade war has been a secondary influence thus far is also evidenced by the underperformance of domestically oriented Chinese equities.

A potential reversal of protectionist rhetoric will certainly be a strong positive catalyst for EM risk assets, but to sustain a rally we would need to see a turn round in domestic confidence in China, which has required increasing amounts of policy help through the cycles. But there is so far no compelling evidence of strong support coming through this time. 

Gold lures investors as gyrating markets take shine off other asset classes

A breakout of unpredictability has seen the metal re-establish its haven status with investors warming up to gold as markets are gyrated by apprehensions about slowing global growth. As US equities tumbled in December, the holdings of gold-backed exchange-traded funds grew by 2.25m ounces.

Helping to push the value of the metal to six-month highs of higher than $1,290 a troy ounce. That forced funds who had placed speculative wagers against gold in the US futures market to protect their positions, moving the market from a net short to a net long position (where bullish wagers outnumber bearish bets) for the first time since June last year.

Analysts also believe there has been a significant rise in bullish bets and short covering although this has still to be mirrored in official data. Reports gathered by the US Commodity Futures Trading Commission are not being published because of the limited government shutdown.

For most of 2018 gold was out of favour, struck by the strength of the dollar and interest rate rises in the US, which undermined the charm of assets such as the precious metal that provide no yield. That saw gold trade as low as $1,174 in August despite rising geopolitical concerns and the fallout from US-China trade dispute.

Then sentiment towards gold improved towards the end of the year as US stock markets fell and volatility increased. That pattern has only extended into 2019 amid speculation a slowing US economy will compel The Federal Reserve to cease raising interest rates.

With some analysts predicting that gold can endure shining as long as markets remain volatile. A fact underlined only late last week after a better than expected US jobs report saw equity markets bounce.

What are the key drivers and fears of current market conditions?

Although the recent market slump has rekindled the controversy about whether modern machine-driven or algorithmic markets can intensify the harshness of any volatility, the underlying drivers of the instability are more traditional.

As 2018 progressed, investors became perturbed at three factors: signs that the global economy is softening; the impact of tighter monetary policy in the US and the end of quantitative easing in Europe; and the intensifying trade war between the US and China.

The global economy started last year on a firm footing, but markets are consistently fixated on inflexion points. Since the summertime the impact of US tax reductions has appeared to wane, European growth has

moderated, and China’s decelerating economy has been pummelled by the trade row.

That has led analysts to curtail their projections for corporate profits in 2019. At the same time, the Federal Reserve raised interest rates four times last year and has kept shrinking its balance sheet of bonds acquired in the aftermath of the financial crisis. That has lifted short-term ultra-safe Treasury bill yields to a 10-year high and undermined the long-term argument that there is no substitute, which has helped sustain market estimates.

As a result, Treasury bills beat the yields of virtually every major asset class last year. Goldman Sachs says over the preceding century there have only been three separate times when Treasury bills have experienced such a comprehensive out-performance: when the US ratcheted up interest rates to 20 percent in the early 1980s to tame inflation; during the Great Depression; and at the start of the first world war.

Brexit or no Brexit to what extent will London’s financial sector will take a knock in 2019?

As Theresa May steps up attempts to make MPs to endorse her Brexit deal, Britain’s financial services industry appears, to be one of the best-prepared sectors for quitting the EU.

This is a credit to the City of London’s international banks, asset managers and insurers and to regulators. Yet, however, carefully it has equipped itself and whether Brexit happens via a signed compromise, 2019 will mark a major knock to the City’s pre-eminence.

When banks started in 2016 to apply to the jurisdictions in Frankfurt, Dublin and Paris for authorisation to set up post-Brexit subsidiaries, some ridiculed the precautions as over-vigilant. Although Brexit would terminate the habit of using London as a hub from which to operate business with clients in the other 27 EU countries, a compromise would reflect something analogous to this “passporting” agreement.

With fewer than three months to Brexit day on March 29 and a deal still illusory, the financial sector’s preparations look shrewd, not paranoid. In

the short term, some disruption looks likely despite the preliminary work. Fears that EU companies’ derivatives contracts would be unqualified for clearing in London were addressed late last year when the European Commission permitted a year’s deferment.

Other hiccups remain, including concerns over matters as core as EU governments’ capability to issue bonds through London. Once Paris and Frankfurt have developed up the capability and proficiency to manage such business themselves. EU policymakers are expected to require it to go.

In extremis, up to a fifth of the City’s turnover is at risk. London’s stature as a centre of effective governance, built on English law, will afford some insurance. As long as investors, and the market liquidity they provide, remain in London, so will the ecosystem that causes the City to be Europe’s biggest financial hub.

To offset lost business and ensure London can compete globally, activists are advocating that the UK to cut taxes. The City is also pinning hopes on growth sectors such as financial technology.

Yet, even in spite of the best-laid plans, Brexit will inevitably contribute to business being given up to European centres and diverse global hubs, predominantly New York. The question is how much?