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FINANCIAL MARKETS: MOVING INTO 2017

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Elizabeth Belugina

Elizabeth Belugina, the Head of Analytical Department at FBS

Elizabeth Belugina

Elizabeth Belugina

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.

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A rare sight? UK blue chips, sterling rise in tandem

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A rare sight? UK blue chips, sterling rise in tandem 1

By Joice Alves and Ritvik Carvalho

LONDON (Reuters) – A surging pound is failing to hold back Britain’s exporter-heavy blue-chip FTSE 100 in 2021, as its impact is outweighed by expectations vaccine rollouts will boost global economic growth and commodity prices will rise.

Sterling, the best performing G10 currency in 2021, has risen to near its highest in three years as global investors chase assets in countries whose vaccine programmes are ahead, and on some relief that a Brexit deal was agreed.

Reflation trade’s big FX winner: GBP

The British currency and the FTSE 100 tend to move in opposite directions. Almost 80% of UK blue-chip firms’ revenues come from abroad and a stronger pound makes them less competitive, while their stocks become pricier for overseas investors.

But the FTSE 100 is the best-performing equity market in 2021 even as sterling rallies, which would usually hit company earnings projections.

Analysts say both sterling and the FTSE are poised for growth, as an economic boost from vaccination rollouts and a rebound in commodity prices, which particularly helps the resource-heavy FTSE, outweigh the impact of a strong pound on stocks.

FTSE 100 outperforms in 2021

A rare sight? UK blue chips, sterling rise in tandem 2

“If a really strong recovery takes hold, with commodities prices in the vanguard, the pound’s influence could prove to be less powerful than the earnings and dividend streams of the big miners and oil producers,” said Russ Mould, investment director at AJ Bell.

Goldman Sachs analysts, bullish on oil and copper prices, see further FTSE support from rising commodity prices.

Expecting a potentially expansionary UK budget on Wednesday and seeing a very slim chance that the Bank of England will cut interest rates, the U.S. bank sees sterling outperforming.

This isn’t the first time the negative correlation between sterling and the FTSE has broken down — during the March 2020 COVID-19 market crash both tumbled.

Past breakdowns of sterling/FTSE inverse correlation A rare sight? UK blue chips, sterling rise in tandem 3

Sterling and UK stocks remain at the mercy of global investor sentiment. When broader markets slide, British assets suffer, especially given the UK’s sizeable current account deficit, so the twin rebound may rely on a benign market backdrop.

But valuations look attractive for British blue-chip stocks, which trade at 14.6 times 12-month forward earnings, a far cry from the MSCI all-country world stocks index’s 20x, according to Refinitiv data.

“The UK market has been a serial underperformer for some time,” Mould said. “If we get an inflationary recovery, then the UK could be just what investors are looking for: plenty of exposure to a cyclical upturn, especially via commodities; cheap, after its underperformance.”

UK stocks are one of the cheapest

A rare sight? UK blue chips, sterling rise in tandem 4

(Reporting by Joice Alves and Ritvik Carvalho; Editing by Tommy Wilkes and Jan Harvey)

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Sterling eases to 2-1/2 week low against dollar

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Sterling eases to 2-1/2 week low against dollar 5

By Ritvik Carvalho

LONDON (Reuters) – Sterling eased to its lowest level against the dollar in two and a half weeks on Tuesday, as the strengthening U.S. currency put a brake on gains that had taken the pound to 2-1/2-year highs last week.

The pound has so far been the best performing G10 currency in 2021, up 1.65% against the dollar, although its lead over other currencies is diminishing.

Bets that Britain’s rapid vaccine rollout would underpin an economic rebound boosted sterling as far as 4.2% above its year-end price to the dollar as recently as last week.

However, expectations of a faster U.S. economic recovery and for the Federal Reserve to show greater tolerance to higher bond yields than other central banks have boosted the greenback in recent days.

By 0838 GMT, sterling was 0.2% lower at $1.3897, earlier hitting a 2-1/2 week low of $1.3867. It was flat to the euro at 86.42 pence.

“Momentum in sterling has somewhat eased in the past few days, but ever more encouraging data on vaccination and contagion in the UK should continue to underpin hopes of a faster recovery, and keep a floor under the currency,” ING said in a note to clients.

British house price growth picked up unexpectedly last month, mortgage lender Nationwide said on Tuesday, defying expectations of a slowdown as finance minister Rishi Sunak prepares new budget measures to boost the market.

House prices rose 6.9% in annual terms in February from 6.4% in January, Nationwide said, above all forecasts in a Reuters poll of economists that had pointed to a slowdown to 5.6%.  Sterling eases to 2-1/2 week low against dollar 6)

(Reporting by Ritvik Carvalho)

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Lindt & Spruengli aims for 6-8% sales growth, announces share buyback

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Lindt & Spruengli aims for 6-8% sales growth, announces share buyback 7

By Silke Koltrowitz

ZURICH (Reuters) – Swiss chocolate maker Lindt & Spruengli said on Tuesday it aimed for 6-8% organic sales growth this year thanks to pent-up demand after the pandemic hit its business and made net profit slide last year.

Chocolate makers are grappling with subdued demand as consumers buy fewer chocolates as gifts or while traveling during the COVID-19 pandemic, and Lindt has also been hit by the temporary closure of its own stores.

Net profit fell 37.5% to 320.1 million Swiss francs ($349.53 million) in 2020, the maker of Lindor chocolate balls and gold foil-wrapped Easter bunnies said in a statement.

But the company said it was convinced that the chocolate market, and in particular the premium segment it operates in, would continue to grow in the future.

It said it expected organic sales to grow 6-8% this year and then, from 2022 onwards, 5-7% per year in line with its medium term guidance.

The Zurich-based company also announced a new share buyback programme of 750 million francs from June this year to the end of next year and will pay out a dividend of 1,100 francs per registered share and of 110 francs per participation certificate.

It had paid out an exceptionally high dividend for its anniversary last year.

“Overall, a solid print with cash flow and the announcement of a buyback the main positive surprises,” Kepler Cheuvreux analyst Jon Cox said, adding the outlook was also upbeat, but more or less in line with street expectations.

Lindt & Spruengli had already flagged a 6.1% drop in 2020 organic sales in January. The contraction in sales led its operating profit margin to fall to 10.5%, from 13.2% in 2019.

It said the margin should return to 13-14% this year and then to 15% in 2022.

($1 = 0.9158 Swiss francs)

(Reporting by Silke Koltrowitz; Editing by Riham Alkousaa and Brenna Hughes Neghaiwi)

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