- Markets entering a scratching head period
- Globalisation has already peaked
- Remains to be seen if developments are short term reversals or more structural
- Retaining bias to cyclicals and short duration good quality corporate bonds
Anthony Rayner, manager of Miton’s multi-asset fund range, comments:
A number of multi-decade, multi-dimensional trends are currently being challenged. From an economic perspective, we have moved from a disinflationary environment, which has dominated since the 1980s, to an inflationary environment. Geopolitically, globalisation and free trade, which have been the prevailing orthodoxy for decades, are being challenged by a shift towards protectionism. At the same time, monetary policy has done a hand brake turn, away from quantitative easing, with interest rates rising from multi-decade lows.
Of course, these dynamics are not operating in isolation of each other. The Chinese economy joining the world economy back in 2001 was a major driver in pushing global consumer and wage inflation lower, while the recent inflation pick-up is one of the reasons that interest rates are on the rise.
Unsurprisingly, the combined effect of these forces is leading to a pickup in equity market volatility, reflecting a higher degree of uncertainty. This feels particularly volatile, coming as it does after a period of fairly black and white markets, characterised by an extended period of ‘lower for longer’, when interest rates and bond yields moved to multi-decade lows, before a rebound in growth and an inflation pickup signalled a ‘reflationary’ period.
The graph below sketches out this economic context and its impact on equity markets. The US ISM manufacturing survey has been a pretty good proxy for US economic growth over time, showing the latter part of the lower for longer period (anything below 50 is considered consistent with economic contraction), before giving way to a building economic growth momentum from the beginning of 2016. We’ve also plotted the FTSE World cyclicals relative to FTSE World defensives, which shows clearly how cyclicals underperformed defensives during the lower for longer period, while cyclicals have outperformed in the reflationary period.
During these two distinct periods, once the economic scene was set, equity markets and most other assets behaved in a fairly understandable way. That said, at the turning point in the first half of 2016, there was a lot ambiguity in the data which translated into a directionless period for equity sectors.
The combination of whether we’re seeing another turning point now, after a very strong run from cyclical sectors, combined with what appears to be a shift in some of the longer term dynamics, is leading to a scratching head period for markets.
It’s fair to say that there’s decent economic momentum globally, with a pickup in inflation that’s encouraging at these levels, rather than discouraging, while the path of US interest rates have been fairly clearly sign posted. As ever, there are risks to the more probable range of scenarios but an economic base case can be fairly easily constructed which, on many levels, feels like a sensible exit from an extremely unusual period in economic and financial market history.
Questions remain as to whether markets will respond to this in a disorderly manner or not and it’s unclear at this stage which part of the equity market will lead from here, if , indeed, it will be led higher.
Turning to protectionism, at this stage it’s probably fair to say we have reached ‘peak globalisation’ with global trade as a percentage of GDP falling in several consecutive years now. That doesn’t answer the question of whether we’re heading into a trade war proper, and by that we mean action severe enough to lead to materially slowing economic growth and further momentum to inflation, or stagflation.
Gauging the answer as to whether protectionism will increase materially is difficult as it involves understanding political actors, though in certain parts of the world this has got easier. The Chinese president is now “president for life”, while the Russian president looks to have at least another six years, and in many ways both have set their stall out pretty clearly. Donald Trump, where the recent protectionist measures started from, has been less easy to get a handle on, partly as he is so unconventional but also because his belief system is less clear cut.
What we can say is that he’s surrounding himself with an increasing number of economic nationalists, and short term political opportunism might be more tempting than economic rationalism.
In summary, markets are trying to get their heads around whether a number of new developments are short term reversals, or something more structural, including inflation, protectionism and interest rate rises. The market’s job is to extrapolate, ours is to construct a portfolio for the data we can see in the here and now. As a result, we retain a cyclical bias in equities and a bias for short duration good quality corporate bonds. As ever, liquidity is key for us, so that we can move quickly if the data changes.
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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