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AUTUMN HAS COME: NEW SEASON OF FINANCIAL MARKET

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Elizabeth Belugina

By Elizabeth Belugina, head of analytical department at FBS

Elizabeth Belugina

Elizabeth Belugina

As the holiday season is at an end, time comes for traders and investors to reassess the economic outlook and invent new trade ideas. The general public also awakens from the summer hibernation and wants to make some investment decisions. In this article we will make a review of the current financial situation in the world and outline the prospects for the main assets.

Macroeconomic picture

Developed economies remain heavily dependent on monetary help from central banks. So far, Brexit decision hasn’t led to the economic apocalypse predicted by many analysts as it’s clear that Britain won’t immediately part with the EU. Financial markets were quick to digest the shock. As for the economy, it seems that the United Kingdom may avoid recession: Moody’s predicts growth of 1.5% this year.Despite uncertainty about the nation’s future British economy is getting help from monetary and fiscal stimulus. Elsewhere the euro area’s and Japanese economic growth remains anemic and inflation keeps undershooting the target level. All in all, growth may be characterized as sluggish, but for now the situation doesn’t appear critical.

The United States stands apart from other advanced nations. On the one hand, growth of the world’s leading economy slowed down to just 1.1% in June quarter. However, industrial production, durable goods orders and residential construction give reasons to believe that we’ll see better figures in Q3: Atlanta Fed projects 3.5% growth. American labor market seems to be in good shape and consumer sector is strong. Low inflation though remains one of the main obstacles to rate hikes in the US: core personal consumption expenditures index (PCE), the Fed’s preferred inflation measure,rose by 1.6%y/y in July that is below 2% target.

Emerging market economies, which attracted a lot of capital in past months, do not actually have solid economic fundamentals. Many of them depend on China with its unbalanced economy, which experience a clear slowdown. In August, Moody’s raised its short-term outlook for the emerging market economies, which are part of G20, but still they are extremely vulnerable to potential US rate hike: if America raises interest rates, this will lead to a major outflow of cash from emerging markets back to the US.

Currencies

The main question of interest for Forex traders is the timing of US interest rate hikes. The autumn Federal Reserve meetings will take place on September 21 and November 2. It seems that the US central bank will ultimately have to tighten policy as it did promise to act this year and is running out of excuses not to do so, but a rate hike is more likely in December than in the autumn months. Although the inaction in September may once again hurt the greenback, the closer the winter, the stronger the expectations of a hike and, consequently, the US currency should become. US dollar index remains in a broad sideways trend. By the end of autumn, it will likely move towards its upper border in the 99.00/100.00 area.

US dollar index, weekly chart

US dollar index, weekly chart

The single currency lacks fundamental reasons to strengthen because of the loose monetary policy of the European Central Bank, which is already set in place. However, EUR/USD has been trading in a rather stable fashion in the recent months.It happens because of the euro area’s large current account surplus and the fact that fragile European banks don’t feel good enough to invest money abroad, so monetary outflows from the region are limited.Taking into account the fact that the euro is off highs, there’s the risk that the ECB doesn’t deliver new monetary easing expected by some analysts. In the absence of September rate hike in the US, odds are that EUR/USD will continue moving sideways fluctuating around 1.1100.

Japanese yen retreated from highs, but for the time being it will be very hard for USD/JPY to reverse the downtrend. Analysts expect the Bank of Japan to ease policy on September 22, but at this point it will be really hard for the regulator to exceed the market’s expectations. That’s why there’s the risk that any new BOJ measures stimulus measures will have limited impact on the currency market. Strong psychological support at 100.00 is the key level to watch on the downside. In case of good economic data from the US combined by monetary easing from the Bank of Japan and other central banks, resistance for USD/JPY will be at 107.50 and 110.00.

Commodities

Oil price rose on speculation of output freeze talks by the world’s largest producing nations.The market is focused on International Energy Forum in Algeria on September 26-28. However, discord in the Organization of the Petroleum Exporting Countries (OPEC) is still severe and the possibility of an agreement isn’t high. Moreover, production levels in both OPEC and non-OPEC members are at the record highs, while production in Nigeria is recovering after the disruptions, so even if there is a deal to freeze the output at the current level, it won’t have a sizeable impact on the immense oil supply.From the demand point of view note that many refineries will stop operation for the seasonal maintenance ahead of winter. As a result, it would be very hard for Brent to stick around $50 mark. According to Reuters poll, Brent would average $45.44 a barrel in 2016. Up to this point this year’s average was about $42.6.

Brent oil, daily chart

Brent oil, daily chart

Gold is one of this year’s best performing asset, despite consolidation in the last two months. Recently the precious metal was under the negative impact of the increased US rate hike expectations. The prospect of higher interest rates makes gold less attractive to investors as the metal doesn’t provide yield.Demand for gold jewellery, which accounts for more than half of total gold demand, declines because of higher price.However, expansionary monetary policy of the most major central banks and negative interest rates in Europe and Japan in particular is a supportive factor for gold. In addition, things like Brexit, Italy’s troubled banking sector and geopolitical tensions in the Middle East are still capable of creating risk aversion. All in all, gold may appreciate in the medium term, but the overall strength of American economy and the Fed’s policy tightening won’t allow it to make a big rally.

Stocks

The resilience in American stock market may be largely explained by the approaching US presidential election due on November 8. At the moment the consensus is that Hillary Clinton will replace Barack Obama at the job. The Democrats are expected to retain the White House, while the Congress will be split into Democratic Senate and Republican House. Such layout would mean that the divided leadership won’t be able to produce any fundamental changes in economic policies. In this case the Federal Reserve will have to keep taking care of the economy. Such scenario is good for risk sentiment and for markets as it represents a blissful thought that there are no shocks ahead. Clinton is now ahead of Trump, but should the lead narrow ahead of the election, uncertainty may cause spike in volatility as the market is now pricing too big a chance of Clinton’s victory. This should provoke bearish correction in American equities.Trump victory may lead to a fiscal stimulus and strong USD. The first debate between Trump and Democrat Hillary Clinton will take place on September 26.Other risks for stocks include US interest rate hike and decline in oil.

S&P 500, daily chart

S&P 500, daily chart

Emerging-market stock shave risen by more than 20% over the past six months. Taking into account the crowded positioning, riskier assets are ready for correction, at least on profit taking.

Conclusion

With the end of summer volatility is bound to increase. US Presidential election, talks between oil exporters and expectations of action from major central banks (tightening from the Fed and easing from the ECB, the BOE and the BOJ) will make autumn a busy season. High-yielding assets have been recently in great demand, but the ability of this trend will depend whether the central banks keep fueling it by easy monetary policy. More easing from European and Japanese central banks, Federal Reserve on hold in September, Hillary Clinton becoming the US president will make riskier assets enjoy more gains. At the same time, risk of uncertainty associated with the upcoming events can give the market reason for correction. Other risks not discussed in this article include Chinese yuan devaluation and the maybe bubble in sovereign bond market.

Trading

Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 1

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 2

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 3

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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