Daniel Stanley, Head of FX at London-based foreign exchange specialists Global Reach Partners
Where has the time gone? 2018 seemed to have just started but we now find ourselves heading quickly towards the end of its first quarter. While there has been relative stability amongst the key currencies in the early part of this year, a number of key issues could impact the value of the Dollar, Pound and Euro in the months ahead.As ever, global businesses which trade in these and other international currencies will be keeping a close watch on emerging events and how the world leaders deal with them, hoping it will not have an adverse effect on trading and overall profitability.
Looking firstly to the US, the unpredictable antics of President Trump continue to keep the rest of the world engaged in the policy direction of the world superpower under his leadership. Putting aside Mr Trump’s sometimes brash and often unconventional approach to foreign policy matters – which in themselves have the potential to impact on the value of the US Dollar – domestic issues are more likely to determine the currency’s value in the months ahead. The first of these is the prospect of a further rise in US interest rates. After three rate rises over 2017, there is a strong expectation that we could see another three or possibly four increases from the Federal Open Market Committee this year. The continued rise in employment and the surging stock markets, which had some of the steam taken out of them in last month’s drop in many shares, are key reasons for these anticipated rises.
Another important factor is President Trump’s tax cutting agenda. This is seen as a huge gift to business and one that will fuel inflation.The overall bill for these cuts is expected to be around $1.5 trillion over the next decade, adding to the US’s existing $20 trillion debt.Anything that bumps up borrowing costs could hinder some of the existing growth of the economy as well as equity valuations.
What could potentially prove to be the biggest threat to the value of the Dollar this year is the investigation over the Trump campaign’s ties to Russia. If evidence emerges that directly implicates Mr Trump in this saga, it could not only prove disastrous to his presidency, but could also drive down market confidence in the nation’s currency.
The precise impact all these issues will have on the value of the Dollar is impossible to predict at this stage. It is likely the leadership from the Federal Reserve will play a decisive role here. With Jerome Powell replacing Janet Yellen as the new head of the central bank, we are likely to see continuity in its monetary policy. Powell is seen as having slightly dovish tendencies, so with US export improvements being reliant on a weak dollar, he will likely take as cautious an approach as possible to policy tightening.
In the UK, the focus is primarily on Brexit. While it’s currently at its highest level since the 2016 when British voters chose to leave the EU, the Pound still has some way to go to return to its pre-referendum value. The sometimes fraught divorce negotiations between the UK and Europe along with the weakened British Government led by Theresa May are not helping restore a high level of confidence in Sterling. Last summer’s snap general election outcome, where the ruling Conservatives lost their overall majority, led to a two percent fall in the Pound against the US Dollar.The UK currency also continues to slump against the Euro. It fell to an eight year low in August before making a modest recovery to its current level of around €1.13.
Looking ahead, the rise in the consumer price index, triggered mainly by the fall in the Pound after the Brexit vote and rise in the cost of imported goods, is expected to peak later this year. With the Bank of England suggesting last month that interest rate rises are likely to come sooner than expected, this measure combined with a tailing off of inflation could bolster the value of the Pound.This, however, must be weighed up against longer-term uncertainty over how the UK economy will fare outside the EU and the effect this would have on Sterling.
Meanwhile, over on the European continent, things are looking a little brighter although significant challenges also lie ahead. On a more positive note, the European Central Bank is making progress in slowing down the pace of bond buying, outlining the current programme to now end in September this year. The credit crisis, which nearly brought the entire Euro project down, is now showing signs of abating. Some of the emergency loans taken by national banks are being repaid faster than was expected, pushing these institutions into being net buyers or accumulators of the Euro. It, therefore, follows that with growing demand for the asset, prices should also rise.
Potentially more worrying for the EU is the current political situation in Germany where Angela Merkel continues to struggle to form a coalition government. The prospect of entering a partnership with the SPD seemed a potentially stable option but, at the time of writing this piece, a critical vote on the coalition hangs in the balance with strong opposition coming from some leading social democrats, including the leader of its youth wing. The ultimate success of this coalition will likely determine Ms Merkel’s political career and will undoubtedly impact the wider single market economy.
For businesses which transact in these and other currencies, the need for diligence remains crucial in managing exposure and protecting profitability against fluctuations. Gaining an initial understanding of the level of risk is critical for globally active companies, so they are well-placed to set out an appropriate budget rate and create a suitable hedging plan. From there, a range of effective foreign exchange management tools, including forward contracts, spot deals and orders, can help them manage this uncertainty. It’s important they get the best advice on which ones are most suitable for their business needs.
With a high level of political volatility across the globe, 2018 has the potential to provide another roller coaster ride for the world’s economy. While the business community can have some influence on events that will, as ever, be limited. They must therefore ensure they are at least prepared for the journey ahead.
Cryptocurrencies: the new gold?
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.
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.
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.
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.
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.
Energy stocks drag down FTSE 100, IG Group slides
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)
Wall Street bounce, upbeat earnings lift European stocks
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)
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