Elizabeth Belugina, Head of the Analytical Department at FBS
This year advanced economies face serious political challenges: the Brexit vote in June with its surprising and now the US presidential election. As the battle between the Democratic candidate Hillary Clinton and the Republican nominee Donald Trump is very intense, the future of the United States and its markets looks uncertain.
It’s worth mentioning that the public opinion of both challengers is negative. According to Washington Post-ABC News Tracking Poll, 47% of registered voters have a “strongly unfavorable” view of Clinton and Trump alike. As a result, November 8 election will be about trying to choose a lesser evil. In addition, both candidates have their great weaknesses. For Clinton, the biggest problem is a new FBI probe into her email use, while Trump’s ratings suffer from the scandal involving women accusing him of sexual harassment or assault.As a result, neither candidate possesses the key competitive advantage and neither looks significantly more attractive than the other, so at this point either outcome is possible.
In the recent days,investors were rethinking the positions, which had been built on the expectations of Clinton’s victory. Trump’s chances to win the race used to underpriced, and the market tried to correct that: risk aversion increased making stocks and the US dollar decline. Once we get to the election day, the actual outcome will provide fresh drivers for all key markets.
As the position of Trump has strengthened in the recent days, the US dollar declined. Hillary Clinton is regarded as the one who will maintain the status quo or, in other words, America’s current policy. If she’s elected, it would mean that everything will go the same way as if there were no elections and Barack Obama administration continued to operate. In this case the Federal Reserve will be able to proceed with a projected rate hike in December. On the other hand, Trump’s election will significantly change the US political landscape and many new risks will appear. There will be new doubts about the US economic performance, and the Fed may decide that it’s too dangerous to tighten monetary policy this year. So, Hillary will be positive for USD/JPY and USD/CHF, while Trump, on the contrary, would help the Japanese yen and the Swiss franc. In addition, the greenback may have good chances versus the British pound, which suffers from the Brexit concerns.
It’s more difficult to say how the election result will affect higher-yielding commodity currencies. Although the US dollar may be initially hurt in case Trump wins, these currencies are extremely vulnerable to the market’s risk aversion: if traders are afraid that there’s some kind of collapse, they won’t seek higher yields and choose safer assets like gold. Moreover, in the longer term it’s necessary to take into account that Trump is expected to introduce fiscal stimulus, which would require higher Fed’s interest rates. Only time will show how soon the market will start to price in higher greenback, if Trump occupies the Oval office. And, of course, emerging-market currencies and especially the Mexican peso will get under negative pressure in the Trump presidency scenario – this has something to do with the fact that Trump proposed to build a wall on the Mexico-US border.
The VIX index, which measures expected US stock market volatility, is near the highest levels since Britain voted to leave the European Union. Not only the US stocks were affected by the mounting uncertainty, European shares are hit as well.
The short-term market’s reaction may offer trade opportunities. Trump will certainly bring more volatility both in the short and longer terms. Be aware that Trump is associated with tax cuts, which will likely increase America’s budget deficit, threats to remove Fed chairman Janet Yellen, renegotiation of trade agreements with Canada and Mexico and aggressive trade policy in relation to China. If Trump gets elected, we may see a Brexit-like reaction in the American stocks in the short-term: there was an immediate reaction to the downside, S&P 500 lost more than 5% in the following days. Trump is closer to the US than Britain, the impact may be bigger.At the same time, Trump presidency will mean a lower probability of the Fed’s rate hike in December. So, after the US stock market may find something positive after the initial decline.
Remember that the more the market is afraid of Trump now, the greater the relief rally will be there if Clinton wins.Hillary’s victory will be in line with the overall upward trend in the US stock markets. At the same time, the investigation will likely make her life difficult, so the longer-term prospects of American market may be not very bright.
The two candidates have very different view on the energy policy. Hillary Clinton supports alternative energy and intends to cut US oil consumption by a third in 10 years. She aims to cut tax subsidies on oil and natural-gas companies and invest in research for clean energy. In the short-term her policies will be aimed at decreasing oil supply and thus bullish for the prices. Trump, on the other hand, proposed to increase oil exploration thus increasing oil supply. Trump has said he wants to lift restrictions on American energy, expand production of oil and natural gas and “save” the coal industry. As a result, his victory would be short-term bearish for oil process.
As for gold, the precious metal, which is used as a hideout from risk, may gain more than $100 in the short-term on winning Trump and lose about $30 on victorious Clinton.
The overall conclusion is that despite the kerfuffle created by the media, one shouldn’t be too dramatic about what’s happening in the US. We should treat this event as the one with high importance and great volatility. We have to be more prepared than we were during Brexit. We must seize this opportunity to make profits or stay out of the market and calmly watch the show.
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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