By Michael Stanes, Investment Director at Heartwood Investment Management
There is perhaps some irony in the fact that the Bank of Japan and the European Central Bank have been futilely trying to devalue their domestic currencies in attempts to stimulate growth and reflate their economies. However, the mention of‘hard Brexit’ sent sterling into a tailspin in the first few days of October, as a clear timetable was set for triggering Article50.
Sterling has shown its vulnerability to perceived hard ‘Brexit’ rhetoric, but we should recognise that conference season has a tendency to induce glib sound bites to appease the party faithful. That said, away from the political noise, we expect currency markets to continue to test sterling in the short term for two reasons.
Currency markets will test UK fundamentals
First, notwithstanding the recent bounce in data, the underlying fundamentals of the UK economy are less supportive from a currency perspective. The UK continues to have a large current account deficit (-5.9% of GDP as of 30 June 2016)relative to the US and other developed economies (the eurozone and Japan are both in surplus), so a weaker currency is one wayto redress this imbalance through the attraction of capital inflows.
The UK’s fiscal position is another concern for currency markets, in light of the UK government’s decision to relinquish its commitment to achieving a budget surplus by 2020. Furthermore, additional Bank of England policy easing remains likely at some point over the next few months, although recent comments from policymakers acknowledging the better growth profile and more positive economic data since June’s vote have dampened down expectations of another interest rate cu in November. Bank of England policymakers continue to highlight the medium term risk of slowing UK growth, highlighting in particular that the shock to economic activity will take time to feed through as businesses adjust spending decisions to the new climate.
Second, we expect the interest rate differential between the UK and the US to be an important driver of sterling’s performance versus the US dollar. Since the start of the period of the US dollar’s ascent in mid-2014, the two-year interest rate differential between the UK and US government bond markets has widened by more than 100 basis points. This trend may well continue with a Federal Reserve looking to raise interest rates and a Bank of England still in easing mode.
However, higher imported inflation over the medium term could provide an offset to UK gilt yields plummeting tool ow.
The tailwind of a weaker sterling supports large-cap UKequities
The tailwind of the currency devaluation – sterling has fallen 12.5% on a real effective exchange rate since before the European Union Referendum – is good news for large-cap UK exporting companies, where two-thirds of their revenues are sourced from outside their home market. This part explains the divergent performance between the robust performance of the FTSE100 and sterling’s decline since Prime Minister May’s announcement. It is also worth noting that in US dollar terms, the FTSE 100 remains 15% off its high in June 2014 and this may represent an opportunity for return-seeking international investors or for international companies looking to target UK companies for takeover. Indeed, we may see more merger and acquisition activity as UK plc is discounted.
For more domestically-exposed small- and mid-sized UK equities, performance has been resilient so far, but we expect this area of the market to be pressured by higher import costs and potentially weaker demand. For these reasons, we have shifted some of our UK equity allocation away from this area of the market and into the FTSE100.
Wall Street set for higher open as bond markets calm; PMIs in focus
By Elizabeth Howcroft
LONDON (Reuters) – European shares jumped on Monday as bond yields stayed below their recent spikes, while risk assets also rallied and Wall Street futures indicated the optimism would continue into the U.S. session.
The rise in European shares followed solid gains in Asian stock markets and saw the STOXX 600 up 1.2% by 1202 GMT. London’s FTSE 100 1.1% higher and Germany’s DAX up 0.7%.
The MSCI world equity index, which tracks shares in 49 countries, rose 0.4%, recovering from the previous session’s multi-week low.
The much-anticipated $1.9 trillion COVID-19 relief bill was passed in the U.S. House of Representatives on Saturday, and now moves to the Senate.
In the bond market, key yields fell from highs seen last week when market participants became wary that when economies re-open from coronavirus lockdowns a combination of massive government stimulus and pent-up consumer demand will cause inflation to accelerate.
The U.S. 10-year treasury yield was down around 3 basis points at 1.429% at 1207 GMT, having dropped from Thursday’s one-year high of 1.614% – although it did edge up slightly overnight.
Germany’s benchmark 10-year Bund yield was down around 5 basis points, also below last week’s spike.
“I think more than anything, people were spooked at the speed of the rise, rather than anything else,” said Michael Hewson, chief market analyst at CMC Markets UK.
“The markets are pricing in a (U.S.) rate hike for next year, and a couple in 2023, and that’s what the Fed needs to push back against – and they haven’t done that aggressively enough.”
He said markets were being boosted by expectations that U.S. Federal Reserve officials due to speak in coming days will provide stronger verbal signals against the rise in bond yields.
“There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields,” wrote Deutsche Bank strategist Jim Reid in a note to clients.
“They simply can’t afford to see it happen with debt so high.”
PMI data for February is also in focus this week. Germany’s factory activity rose to its highest level in more than three years last month, driven by higher demand from China, the United States and Europe.
Manufacturing in Japan grew at its fastest pace in more than two years in February, as strong orders led to the first output rise since the start of the pandemic.
But China’s factory activity grew at a slower pace than in the previous month, missing market expectations, after COVID-19 related disruptions earlier in the year.
Oil prices jumped on Monday, with Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures both up around 1% at 1221 GMT.
Front-month prices for both contracts touched 13-month highs last week. Both contracts ended February 18% higher.
The dollar rose, gaining 0.3% against a basket of currencies by 1222 GMT. The Australian dollar – which is seen as a liquid proxy for risk appetite – recovered some recent losses.
Wall Street looked set for a higher open, with S&P 500 futures up 1.1%. Nasdaq futures were up 1.3% at 1223 GMT, suggesting a recovery for tech stocks.
Bitcoin recovered some recent losses, up 5% at around $47,676 at 1227 GMT.
Also helping sentiment was news that deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.
(Reporting by Elizabeth Howcroft, editing by Ed Osmond and Susan Fenton)
We need more crypto companies to IPO to increase digital asset scrutiny and adoption
By Stephen Ehrlich, Co-Founder and CEO at Voyager Digital
As a publicly listed digital asset trading business, the recent announcement of Coinbase’s IPO has naturally put a spotlight on us at Voyager Digital and we welcome their move as it will improve trust, transparency and above all, adoption of digital assets. It is imperative that the crypto asset space ups its game as there’s still a great deal of scepticism and concern in respect to their legitimacy or even purpose. This scepticism comes even at a time when several well-known household institutional names have entered the space in 2020.
But there are more than just signs that the mood is changing, with even some of the die-hard naysayers starting to accept that Bitcoin and crypto assets are here to stay.
The regulators are slowly coming to the table with the introduction of new rules, for example the US’s SEC is looking to impose greater KYC (Know Your Customer) on crypto wallet providers and France, a vocal advocate of the emerging blockchain technology and digital asset space, is looking to implement anonymity measures to fight money laundering activity.
Being a publicly listed company naturally provides an extra level of transparency and today there are quite a few digital asset focused public companies ranging from Bitcoin miners, crypto investment companies and in Voyager Digital’s case, crypto brokerage firms that allow investors to buy and sell crypto.
Over the Christmas and holiday period Bitcoin has continued its stratospheric rise showing further evidence that investors are hungry for alternative assets. With traditional markets being closed for public holidays, people have had time to read, research and because crypto-assets trade 24/7 they can take action. So while many around the world will have been trying to forget the trials and tribulations of a torrid 2020 by gorging on turkey or goose and opening presents, many investors will have been buying Bitcoin.
This is a trend we expect to continue well into 2021 and beyond. As people become more accepting of the digital asset space and adoption increases, more crypto based businesses will pursue the IPO route and become public companies. This process should become a self-fulfilling prophecy, bringing a greater proportion of the space under the regulatory regimes of stock exchanges and allowing anyone to dig deep into the business, providing greater scrutiny.
But this expansion will present regulators across the globe with multiple challenges. As Bitcoin and other crypto-assets are borderless, it allows brokers such as Voyager the ability to expand quickly, providing secure trading platforms to meet the demand of wider adoption. Regulatory hurdles will be overcome though as we are already seeing forward-thinking Central Banks and established regulators embracing this new asset class and the technology underpinning them. By working with regulators, established crypto businesses and in particular publicly listed ones, can help forge the way for the industry.
The future for crypto assets, Bitcoin in particular, looks bright and we look forward to playing a major role.
Risk currencies, bitcoin recover as yields steady
By Julien Ponthus
LONDON (Reuters) – The Australian dollar and other riskier currencies rebounded against the U.S. dollar on Monday as U.S. Treasuries recovered from last week’s losses.
The benchmark 10-year U.S. bond traded at 1.4153%, well off Thursday’s one-year high of 1.614%.
“The bond market and risk assets are showing signs of stabilisation after the big sell-off last week”, ING analysts commented, expecting that “the dollar’s corrective rally should pause for breath”.
Equities and commodities sold off last week as the debt rout unsettled investors and lifted demand for safe-haven currencies, including the U.S. dollar. [MKTS/GLOB]
Early today, the risk-friendly Australian dollar jumped 0.5% to $0.7743 following a 2.1% plunge on Friday.
The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday, and markets expect it to reinforce its forward guidance for three more years of near-zero rates.
The New Zealand dollar strengthened 0.46% to $0.7259, recovering some of Friday’s 1.9% slide.
The dollar index rose 0.26% to 91.02 after posting its biggest surge since June on Friday.
The euro fell 0.12% to $1.2056, after dropping 0.9% at the end of last week, the most since April.
Pressure has been growing on the European Central Bank to act against rising yields in the euro zone. Traders will focus on a speech later this afternoon by President Christine Lagarde.
“There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields. They simply can’t afford to see it happen with debt so high”, Deutsche Bank strategist Jim Reid told his clients in a morning note.
The British pound drew additional support from bets on a faster vaccine-led economic recovery. Resurgent risk appetite pushed the safe-haven Japanese yen to a six-month low versus the dollar.
Sterling rose 0.17% to $1.3945.
Against the yen, the dollar hit a six-month high of 106.70.
In cryptocurrency markets, bitcoin rose 4% to $47,069 but was still off a record high of $58,354.14 hit on Feb. 21.
(Reporting by Julien Ponthus, editing by Larry King)
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