Connect with us

Trading

EURO: UNCERTAINTY, CHALLENGES AND ECB’S MONETARY POLICY PUZZLE

Published

on

Anastasiya Mileshkina

Anastasiya Mileshkina, Currency Analyst at FBS

Anastasiya Mileshkina

Anastasiya Mileshkina

Following Macron’s landslide victory in French presidential election, the euro spiked to its highest levels in more than six months. The risks to survival of the single currency have finally receded and now investors may enjoy the back-winds from the robust economic data flowing from the Eurozone. Notwithstanding these positive changes, we see further obstacles to the euro on the upside due to numerous headwind factors.

ECB: PLAYING THE WOMAN

In the past years, the European Central Bank has implemented a series of highly expansionary monetary policies to stimulate economic growth of the EZ countries and eliminate a threat of impending deflation. The region’s economic fundamentals have recently recorded strong gains with the composite PMI rising to its six-year high and German Ifo business climate index reaching the record maximum.

Despite the strong indication of the Eurozone economic recovery, the ECB policymakers are still wary of entering the tightening cycle mainly because of the stubbornly low inflation figures. After hitting the central bank’s 2% target in February 2017, annual HCPI inflation stood at 1.5% in March and accounted for 1.9% in April. The indicator has to show a more convincing upward trend for the ECB to take out some of its easing biases. At the present moment, HCPI inflation moves in a disorderly manner justifying the ECB’s continued stimulus measures.

Investors will be waiting for any signs that the ECB moving towards the exit from its extraordinary easing measures at the upcoming meetings. With the ECB being steady on hold and not signaling a winding down of QE, the further appreciation of the euro will be limited.

DWELLING IN POLITICAL UNCERTAINTY

With French presidential election already out of the way, there are still too main political events that might hurt the euro such as parliamentary elections in France and Germany.

While the centrist Emmanuel Macron defeated the anti-EU candidate Marine Le Pen in the presidential election, he still faces a battle in the parliament. French legislative election will be held on June 11 and 18. The voters will choose 577 members of the National Assembly. Macron’s party En Marche is set to take the lead in the election race, but is not expected to win a majority. As a result, the newly elected president will likely preside over an unstable parliament.

The risk is that Macron,just like his political predecessor François Hollande, will fail to tackle France’s economic malaise and stimulate the country’s economic growth and job creation without the solid parliamentary support. If Macron manages to get the much-needed economic reforms through he will be in a better position to work with Angela Merkel and give a new impetus to EZ economic growth and integration processes.

German Chancellor Angela Merkel has been a bedrock of political stability not only in Germany, but in the entire Eurozone. She will lose the chancellorship if Christian Democrats fail to win the majority of votes in the general election scheduled on September 24. Although the odds for such unfortunate outcome are not high, they are not completely off the table.

ITALIAN BANKING AND POLITICAL TURMOIL

Italy is another perennial pressure-point for Europe. In the past months, Italian economy demonstrated a weak performance. If we look at the April reading of Italian retail sales, we will see that the nation’s private consumption remains very sluggish mainly because of the political uncertainty and country’s indebtedness. Fitch Rating downgraded Italy’s sovereign debt from BBB+ to BBB in April citing numerous the country’s unsolved economic problems and mounting political risks ahead of March 2018 elections. Recent political polls show a growing lead of the anti-EU 5 Star Movement which strives for a referendum on Italy’s membership in the Eurozone. If this political establishment manages to gain a significant popular support, the next general election will most likely result in a hung parliament unable to press ahead with meaningful economic reforms.

The most pressing concerns, however, goes beyond Italians political problems and even beyond its fragile economic growth. The biggest area of alarm is Italian banking sector. According to the government estimates, Italian banks reported 360 billion euros in non-performing bad loans in 2016. Italy is a member of the Eurozone, so its banking crisis is not just its own problem. Uncertainty in the Italian banking sector may divert risk-averse investors from Italian assets, and thus the euro, impacting its value. In addition, should Italy’s largest financial institutions fail, the country will definitely sink into a domestic economic crisis that, in turn, will significantly hurt the value of the euro. The domino effect will make the negative consequences spread to other euro economies.

GREECE: BEING SADDLED WITH DEBT

Another epicenter of the euro region’s turmoil is Greece which is currently in talks with EU officials over its debt relief. While the deal is still not reached, the further round of negotiations is planned in the upcoming weeks. Whether Greek authorities manage to strike a debt-relief agreement with the Troika is still a question mark. There is also great uncertainty regarding the ability of the unpopular Alexis Tsipras’s government to bring the country’s economy to a more sustainable level in terms of debt serviceability. The debt-relief deal should be reached before the September election in Germany. Otherwise, Ms.Merkel will unlikely trade her solid electoral support for the Greece’s bailout. And if this bailout payment is forgone, the probability of country’s default will rise opening up a discussion around a Grexit.

All these potentially ground-shaking events and economic problems that we’ve identified in our article represent challenges for the euro area and the single currency. Whether the Eurozone manages to withstand these plentiful financial and political headwinds is the question that still needs to be answered. Given the degree of sustainability the euro area demonstrated in the past years, we remain optimistic and expect it manages to scrape through the spate of crises that are yet to come.

Trading

Cryptocurrencies: the new gold?

Published

on

Cryptocurrencies: the new gold? 1

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 2

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

Continue Reading

Trading

Energy stocks drag down FTSE 100, IG Group slides

Published

on

Energy stocks drag down FTSE 100, IG Group slides 3

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

Continue Reading

Trading

Wall Street bounce, upbeat earnings lift European stocks

Published

on

Wall Street bounce, upbeat earnings lift European stocks 4

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Latest Articles

A practical guide to the UCITS KIIDs annual update 5 A practical guide to the UCITS KIIDs annual update 6
Investing14 hours ago

A practical guide to the UCITS KIIDs annual update

By  Ulf Herbig at Kneip We take a practical look at the UCITS KIID What is a UCITS KIID and what...

Oil prices steady as lockdowns curb U.S. stimulus optimism 7 Oil prices steady as lockdowns curb U.S. stimulus optimism 8
Business17 hours ago

Oil prices steady as lockdowns curb U.S. stimulus optimism

By Noah Browning LONDON (Reuters) – Oil prices were steady on Monday as support from U.S. stimulus plans and jitters...

Dollar steadies; euro hurt by vaccine delays and German business morale slump 9 Dollar steadies; euro hurt by vaccine delays and German business morale slump 10
Business17 hours ago

Dollar steadies; euro hurt by vaccine delays and German business morale slump

By Elizabeth Howcroft LONDON (Reuters) – The dollar steadied, the euro slipped and riskier currencies remained strong on Monday, as...

Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 11 Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 12
Business17 hours ago

Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash...

Stocks rise on recovery hopes 13 Stocks rise on recovery hopes 14
Business17 hours ago

Stocks rise on recovery hopes

By Ritvik Carvalho LONDON (Reuters) – Global shares rose to just shy of record highs, as optimism over a $1.9...

Fragile recovery seen in global labour market after huge 2020 losses - ILO 15 Fragile recovery seen in global labour market after huge 2020 losses - ILO 16
Business17 hours ago

Fragile recovery seen in global labour market after huge 2020 losses – ILO

By Stephanie Nebehay GENEVA (Reuters) – Some 8.8% of global working hours were lost last year due to the pandemic,...

"Lockdown fatigue" cited as UK shopper numbers rose 9% last week 17 "Lockdown fatigue" cited as UK shopper numbers rose 9% last week 18
Business18 hours ago

“Lockdown fatigue” cited as UK shopper numbers rose 9% last week

LONDON (Reuters) – The number of shoppers heading out to retail destinations across Britain rose by 9% last week from...

Alphabet's Verily bets on long-term payoff from virus-testing deals 19 Alphabet's Verily bets on long-term payoff from virus-testing deals 20
Business18 hours ago

Alphabet’s Verily bets on long-term payoff from virus-testing deals

By Paresh Dave OAKLAND, Calif. (Reuters) – For Alphabet Inc’s Verily, a healthcare venture that is one the tech giant’s...

ECB can price climate risk better than the market, Panetta says 21 ECB can price climate risk better than the market, Panetta says 22
Business18 hours ago

ECB can price climate risk better than the market, Panetta says

FRANKFURT (Reuters) – The European Central Bank can price climate risk better than market participants and should make its own...

Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 23 Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 24
Finance18 hours ago

Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash...

Newsletters with Secrets & Analysis. Subscribe Now