Elizabeth Belugina, the Head of Analytical Department at FBS
2016 was a year of big political shocks. We will remember this year by the Brexit vote and Donald Trump’s victory in the US presidential elections. Opinion polls failed to predict the correct outcome of these events. It’s also interesting how the market reacted to the news: British pound has remained under pressure up to this moment despite recovery in the UK stocks, while in America the US dollar reversed upwards within hours and then kept appreciating.
There are reasons to believe that heightened volatility will continue in 2017. After all, there will be a lot of political risks, primarily in Europe: the Dutch election in March, France’s election in April and the German one in the second half of the year. The main source of concerns is the risk that populist parties, which are against the euro, will rise to power. It’s quite natural that after political surprises of 2016 traders will be pricing in the negative outcomes in advance. This means that the outlook for the euro isn’t particularly bright, at least until summer. Later the potential tapering and end of the European Central Bank’s quantitative easing program should help the single currency find the bottom. The odds are that EUR/ USD will visit parity and maybe sink a bit lower.
Before we get deeper in our suggestions about 2017, let’s review the themes and trends of 2016. As we’ve already pointed out, one of them was represented by political shocks. What are the others?
First of all, major central banks are evidently running out of monetary tools to encourage economic growth and inflation. The regulators have been fighting this battle since the global financial crisis. This led to competitive devaluation if currencies, known as “currency wars”. Yet, everything has its limits, and we are now hearing here and there about not monetary, but fiscal stimulus. In other words, governments and not central banks will likely play the leading role in supporting domestic economies. It surely doesn’t mean that we will no longer pay attention to banks’ meetings, but the pressure will probably lift off from the regulators. This, in turn, will improve the market’s growth and inflation expectations. Actually, such trend has begun in December. The better the expectations, the better the market’s risk sentiment. As a result, higher-yielding assets like stocks and oil are in bullish trend, while safe havens like gold and Japanese yen, on the other hand, are on the downturn.
Currencies of countries with brightest economic prospects are expected to benefit. One of such currencies is the US dollar. Traders are currently quite positive about American economic outlook. The prevailing opinion is that business will flourish during “Trump-onomics”. Because of such mood, the US dollar, the key Forex currency, has managed to reach its highest level since 2002.The big question how is how Trump will act. Some of his campaign promises, like building a wall between the US and Mexico, were controversial. Yet, it will ultimately come down to whether fiscal stimulus is introduced and how large it will be. Stimulus would mean stronger economy and make the Federal Reserve proceed with the planned rate hikes. Now the FOMC members foresee 3 rate increases in 2017, and we’ll see how the things go. All in all, the US dollar will have a trump card in comparison with the rest of the major currencies because of monetary policy divergence between America and other developed nations. At the same time, having gained nearly 10% since August, the greenback should have some difficulties in maintaining such immense bullish momentum. If Trump disappoints, the bullish trend may even change, as the market’s positioning has become too stretched. Note that expensive USD might raise the Fed’s concerns making the regulator rein in the rate hikes. All in all, we probably won’t see a single trend for both the greenback and other currencies in 2017: the first 6 months may be pretty different from the second 6 months.
British pound will remain affected by the Brexit uncertainty in the first quarter of the year. For now, the legal issues of who will trigger the UK departure from the European Union are being discussed. Will it be a hard Brexit or soft Brexit? Will the process start in 2017 or later? Until we find out the answers to these questions, it will be hard for the sterling to pick a long-term direction. If the UK Supreme Court says that British government can trigger Brexit, it will be negative for the pound. If the Court rules that the government must seek parliamentary approval, the Brexit process will be definitely delayed beyond March 2017 – something that will spur the pound’s growth. The Bank of England says that its action will depend on the dynamics of British economy – it is ready both to cut and raise interest rates. All in all, British currency has support at 1.2000. If the bears succeed in breaking it, GBP/ USD will enter levels unseen for a couple of decades. If Brexit goes relatively smoothly and economic figures don’t disappoint, the undervalued pound should be able to recover some of the lost ground.
Demand for the Japanese yen will likely remain on the downside in 2017, as the Bank of Japan turned to a new type of monetary policy and began targeting the yield curve. As a result, we expect bullish bias for USD/ JPY with targets around 125.85 and 130.00. At the same time, there will surely be moments of risk aversion (remember all the European elections coming?), and the yen should feel stronger during these moments.
Australian currency looks vulnerable as we head into 2017. Problem #1 is China, Australia’s biggest trade partner. The past year was not easy for Chinese financial markets: the yuan and the stocks made the biggest declines in several years. The year of 2017 poses risks related to capital flight and China’s high debt levels. In addition, there are dismal domestic factors: mining boom is no longer helping Australia, the nation’s GDP contracted for the first time in 5 years and its labor market looks grim. The market will likely expect the Reserve Bank of Australia to cut rates in 2017, and these expectations will do the Aussie no good. Watch the levels of 0.6850 and 0.6500 on the downside. Some help from commodity market may come to the Aussie at the beginning of the year.
Oil prices hit the lowest levels since 2003, but after that managed to bottom in 2016. The Organization of petroleum exporting countries (OPEC) did manage to increase confidence in the market. Crude will likely stabilize near $50, at least in the first half of 2017. However, the advance doesn’t seem sustainable as higher prices will make US shale producers return to the market, while the OPEC has a long history of breaking its promises.
Despite the recent decline, gold still finished 2016 above the opening level. From a technical perspective, the precious metal still looks bearish on the monthly chart. We don’t see a buying signal now, but suggest to monitor this market closely as there should be a point in 2017, when investors turn to gold as a safe haven a refuge from inflation.
US stocks didn’t divert from their long-term uptrend. The lack of any meaningful correction in equity markets has worried many traders in 2016. Taking into account the current optimism about the US economy, it’s still very dangerous to short this market. The best solution is to invest in the sectors favored by Trump, such as infrastructure. Health care and pharmaceuticals should also benefit, if there is a restructuring or abandonment of Obamacare.
Finally, it’s necessary to point out that whatever happens, traders should be prepared. Don’t forget about risk and money management tools as they represent the best way to make sure your money is safe and sound.
Barclays announces new trade finance platform for corporate clients
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.”
What’s the current deal with commodities trading?
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.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
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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