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22/12/2018

08/04/2018

11/06/2017

No Mayday for UK financial markets

FX:

GBPUSD’s sell off earlier was sizable, down 300 pips at one stage, however, it has managed to claw back some of its losses, and was actually higher before we knew that Theresa May had managed to form a coalition government with the DUP, albeit with a slim majority. The fact that as we near the close of the European session GBPUSD is more than 200 pips higher than it was before Theresa May called the general election, suggests that pound traders are not in panic mode, and there are some aspects of this election outcome that been viewed favourable by the sterling market.

The GBPUSD 1-month risk reversal is actually higher on the day, suggesting a drop in the number of traders hedging against a fall in the pound. Thus, traders somewhere are taking the view that the pound could rise in value once the election dust has settled.

GBPUSD 1 –year risk reversals have backed off a recent high, and have fallen to their lowest level since April. However, this suggests that investors have been curbing some of their enthusiasm for a stronger GBP, rather than getting bearish on the currency. This does not suggest that the market is concerned, at this stage, that the outcome of this election will impact Brexit negotiations in a negative fashion.
1-month volatility in GBPUSD is also subdued, and is well below the average for the last 12 months at 8.12, vs. 10.56 annual average.

It appears that this election has a few negative implications for sterling, but investors are concentrating on the positive, which include a higher chance of a softer Bruit, something demanded by the DUP before they would join a coalition with Theresa May and the Conservatives, and a reduced chance of Scottish Independence after the SNP lost a number of seats to the Scottish Conservatives. Since Bruit was like kryptonite for the UK currency a reduction in the chance of a hard Bruit could be positive for sterling in the longer term.
FTSE 100:

The UK index has backed away from earlier highs, but remains well supported at the end of this week, it could even be poised to follow the US indices to fresh record highs in the coming days.

However, there have been varied performances within sectors. For example, utility companies such as Severn Trent, Centrica and the National Grid, all threatened with nationalisation in the Labour manifesto, have fallen in unison today. This suggests that investors are continuing to avoid stocks that could be negatively impacted by a Labour government, just in case Theresa May’s fragile coalition topples and Jeremy Corbyn manages to get his feet under the table in the top job in UK politics.

The top performers today include miners and exporters such as Fresnillo and Smurfit Kappa Group, who benefit from a weaker pound.

In contrast, the weakest performers were in the real estate sector, which tends to be focused on the domestic UK outlook. These stocks are sensitive to the fall in the pound, and any threat to economic growth from political uncertainty. Retailers such as M&S and Next are also some of the biggest losers today, suggesting that traders are continuing to view the UK’s prospects as diminished, even though Theresa May quickly formed a government after yesterday’s election result.
It is worth noting that both volume and volatility in the FTSE 100 has remained subdued, suggesting that the UK election wasn’t a key risk event for UK stock traders compared to say the US elections and the Brexit vote last year.
Bonds:

UK bond yields have been steady over the last 24 hours, suggesting that the large, sensible bond market is not worried by the election outcome. The bond market may have been soothed by the fact that Corbyn’s fiscal plans won’t be put into action (not yet anyway), hence the muted response from bond yields.

Overall, Theresa May has formed a government, but with a very slim majority of just 2 seats. Her new government remains fragile, and popular sentiment seems to be against her. There is a good chance that this government does not last the duration of the Brexit negotiations, but that is a problem for another day.

This election did not spark the imagination of the financial markets, hence the relatively muted response from UK asset prices and the low level of volume and volatility in the FTSE 100 index over the last 24 hours. However, May still has an uphill battle to pass a Queen’s Speech, scheduled for 19th June. If this fails to pass then it is hard to see how her fragile coalition can survive. Thus, muted volatility in UK asset prices may be on pause and not eradicated completely as Theresa May’s position as Prime Minister continues to look shaky.

19/02/2017

US
US equities started the year on the front foot, with all of the major equity indices hitting record highs despite uncertainty over the transition to a new administration. The S&P 500 returned 2.0% on a total return basis in January, meaning it has gained 7.4% since the US presidential election in November.

The fourth-quarter GDP release showed that the US economy grew by 1.6% year-on-year (y/y) in 2016, the slowest annual growth rate since 2011. However, economists remain buoyant about future growth, with consensus estimates for 2.3% growth in both 2017 and 2018. Such upbeat estimates are driven primarily by the prospect of looser fiscal policy in the coming years. However, as we discuss in our outlook piece at the end of this monthly review, investors are beginning to become concerned about the timing and scale of any future fiscal policy stimulus.

US earnings season got underway in January. With just shy of 50% of the index by market cap having reported, S&P 500 earnings per share grew 30% y/y in the fourth quarter of 2016. These strong numbers are primarily being driven by two sectors: energy and financials. The energy sector is being helped by higher oil prices, which rebounded 50% in 2016. Financial stocks have been helped by steeper yield curves and increased volatility in financial markets, which helps boost trading revenues.

07/01/2017

15/11/2016

40,000 Accounts of Top UK Bank Breached, China Approves Cyber Law to Counter Threats

Around 40,000 accounts of a top British bank have reportedly observed suspicious transactions over the past weekend, with money withdrawn from 20,000 accounts over a 24 hour period.

Meanwhile, China has adopted new cyber security measures “to counter growing threats such as hacking and terrorism.”

Tesco Bank has halted online payments for current account customers, in response to the hackings, and the bank's Chief Executive Benny Higgins told the BBC he was "very hopeful" customers would be refunded the money within 24 hours.

There have been complaints about money being withdrawn without permission, cards being blocked and long delays in contacting the bank via phone. Customers will not be able to make online transactions until the situation is back under control, which may take up to 48 hours.

A Hack?

A security consultant who has worked with Europol, Prof Alan Woodward, said this would be an unprecedented breach of a British bank, as he has never heard of an attack of this nature or scale within the UK, particularly whereby it appears that the bank's central system is the target.

Tesco has not used the word "hacking" to describe the breach, but accepts responsibility for any financial loss that may result from the fraud. Shares in the bank, which has more than seven million customer accounts and 4,000 staff across Edinburgh, Glasgow and Newcastle, has fallen by more than one percent in early trading.

There are suggestions that as a result of the breach, the damage to the trust held in Tesco Bank, and online banking in general, will be greater than the financial cost.

The National Crime Agency (NCA) and the UK's data regulator, the Information Commissioner's Office, are looking into the case.

Chinese Cyber Security Law

Beijing says its proposed legislation, set to take effect in June 2017, is to counter growing threats such as hacking and terrorism and an "objective need" of China as a major Internet power.

Though critics suggest the law will enhance restrictions on China's Internet, already subject to the world's most sophisticated online censorship mechanism, an official of the Chinese Congress, Yang Heqing, told the press that as one of the countries faced with the greatest Internet related security risks, China needs to establish and perfect network security legal systems.

According to Reuters, some of the contentious provisions in the final draft of the law include requirements for "critical information infrastructure operators" to store personal information and important business data in China, provide unspecified "technical support" to security agencies, and pass national security reviews.

Over 40 global business groups petitioned Chinese Premier Li Keqiang in August for an amendment of the controversial sections. Some of the companies fear they would have to hand over intellectual property or open back doors within products in order to operate in China's market.

Director of the Cyberspace Administration of China's cyber security coordination bureau, Zhao Zeliang, told reporters that every article in the law accorded with rules of international trade

19/10/2016

ECB Preview: EUR/USD volatility to surge amid QE speculation

The European Central Bank (ECB) is scheduled to announce its latest monetary policy decision and would grab the centre stage on Thursday. Although, the central bank is expected to hold its monetary policy steady, it might still infuse substantial volatility in the FX market, especially for the EUR pairs.

In wake of recent rumors that ECB might consider winding down its €80bn monthly bond purchase, focus would be on comments from ECB President Mario Draghi over questions about tapering as he addresses a press conference following the policy decision announcement. Investors will also scrutinize Draghi's speech for clues on the central bank’s future plans and a potential extension of the QE program beyond March 2017.

Most economists expect the central bank to announce an extension by year-end and might also tweak the technical parameters of the QE program. A strong signal towards new easing measures, if required, would be enough to attract fresh selling pressure around the single currency.

Technical outlook
From technical perspective, the pair is trading closer to an important horizontal support near 1.0960-50 area. Hence, a sustained break below this important support, leading to a subsequent drop below 1.0935 support marking 61.8% Fibonacci retracement level of 1.0522-1.1616 up-move, would turn the pair vulnerable to break below 1.0900 round figure mark and head towards March lows support near 1.0830-25 horizontal zone before eventually dropping to 1.0715-10 area (yearly lows touched in January).

Alternatively, rebound from current support area might now confront immediate resistance near 1.1060-65 region, representing 50% Fibonacci retracement level. A sustained move above this immediate hurdle seems to trigger a short-covering bounce towards an important horizontal support break-point, now turned strong resistance near 1.1120-30 region above which the pair is likely to aim towards an important confluence resistance near 1.1185-90 region, comprising of a short-term descending trend-line and 38.2% Fibonacci retracement level

19/09/2016

Bank of England Statement on Future Digital Currency and Blockchain Tech

Life in jolly ‘ole England has been quite turbulent over the past year or so, culminating with the epic Brexit vote this summer, changing the way the nation will do business forever more. This appears to be only the first step in their upgrades for future business initiatives, as the Bank of England has decided to revamp their financial services settlement system to include innovations like Bitcoin’s Blockchain technology.

Bank of England wants to be more inclusive and more compatible

The Bank of England has scheduled a redesign of their RTGS (Real-time Gross Settlement) system. RTGS is a payment system that provides the platform for central bank reserves in sterlings, or the electronic counterpart to banknotes, as the risk-free means of final payment settlements. On an average day, RTGS settles around £500bn between banks or almost a third of the UK’s annual GDP.

This system is integral to the economic stability and future of Great Britain, and the bank has been seeking counsel on future revisions throughout 2016. Speaking with the two dozen users of its RTGS system, they would like to see revisions that which would make growing the network to include smaller clients easier. Other benefits include increased security and compatibility with other financial systems, which are also switching over the distributed ledger systems.

“The new RTGS service must be capable of interfacing with a range of new technologies being used in the private sector, including distributed ledgers, if [and] when they achieve critical mass,” the Bank of England says regarding Blockchain technology.

While potentially adding Blockchain technology capability to RTGS looks to be a reason for these systematic revisions, distributed ledgers are not expected to become the core of the system, as it is with Bitcoin, for example.

“The resilience characteristics of the distributed ledger, in particular, are potentially highly attractive from a financial stability perspective. It is however unlikely that this technology will prove sufficiently mature to form the core of the next generation of RTGS, itself.”

There has also been talk of the Bank of England offering its own digital currency, with reports of an RSCoin earlier this year. In their full 58-page consultation paper on the subject of this operational reorganization, they address the potential of a new digital currency. Their statement makes it clear that this is on the table, so to speak, but more research on the idea needs to be done.

“The Bank has a research agenda on digital currencies established for the coming years. The research will analyze the economic and financial stability impact of a potential central bank digital currency, including how it could interact with monetary, financial stability and fiscal policy. The research agenda also includes how a central bank digital currency could be technically implemented.”