Fundamental & World News Update

Posted on Posted in Weekly Analysis

Fundamental update

So world tensions are escalating higher then its ever been on a number of things that are highly affecting the market, I thought it would be good to provide you with the reasoning behind some of the moves we have seen Tensions in Syria With it being reported that Syria used chemical weapons in the rebel held town of Douma, we have seen a mass reaction from a number of world leaders, USA, France and the UK look likely to lead strikes against Assad and his regime, Syria have huge allays in Russia, and Russia look likely to try to protect the Assad regime, Russia is already in huge tensions with some of these countries due to the fallout of the Salisbury poisoning. So how will a war effect things, war between big countries can see investors flock to safe havens, more so commodities, Gold, Oil, This is what has caused the rally in these over this week, once it goes quiet then you will see these have pullbacks. War between countries can also do harm to businesses so you could also see equities fall. Its very likely in the coming days the a coalition airstrike will be done on Syria as the rest of the world want to remove Assad from power. If the USA and Russia come into major conflict then I would expect safe havens to further gain strength. With Morgan Stanley targeting 1450 on Gold and the increasing tensions it may not be too far off over the coming year.

 

Trade Wars

So a few weeks ago Donald trump announced a number of Tariffs on Aluminium and Steel that kicked off a tariff trade war. Mostly this was aimed at China, China devalue their currency to other countries find them cheaper to buy from, something Trump isn’t a fan of because this has taken away a lot of manufacturing jobs and business in the USA. The USA currently have roughly a $60billion a month trade deficit, so they need to reduce this, one way of doing it is via tariffs, to increase income. They are currently on the wrong end of a lot of trade deals, e.g. America have a 2.5% tariff on European cars being sold in the US, the EU charge America 10% for them to sell their cars in the EU. So these are one sided deals that Trump is looking at changing in support of his America first policy. So the tariffs bring a lot of uncertainty to the outlook of economies, China have struck back with high tariffs of their own on US goods such as pork, wine, soybeans etc. so we are getting into a tit for tat trade war between the two. The US being the world largest importer and China being the world largest exporter, America has announced exemptions on tariffs to other countries who are open to renegotiations of their trade deals with the USA, such as NAFTA partners, Mexico and Canada, also the EU and Great Britain have also been exempt. So these has started to ease a bit on stocks, and we have seen them rise again over the last few days, mainly on the back on Trumps comments that President Xi (China president) is open to discussions so renegotiation on aspects of trade. A bit of a whirlwind in regards to the news on this front, but not by a long way is this over. Markets can spike on any sort of news in relation to this so be careful. Trade tensions can see equities (stock markets) fall due to them being able to do less business, or it being more costly for companies to import goods and services due to extra tariffs, so it hits their profit margins, if profit is effected then so will the value of the business. Which causes the overall value of the index to fall.

Overview of each economy

USD

USA currently at the centre of attention for investors due to everything stated above, so now I will just look at the economy.

USA are currently in the middle of a rate hike cycle, having hiked 5 times in the last 17months it shows the US economy is healthy. Market is expecting 2 more rate hikes in 2018 and another 3 in 2019 should data continue to be good. So when I mean a healthy economy this means that we have key economic indicators performing well, they are Gross Domestic Product, Jobs and Wages market, Inflation (recently picking up) Business performance, Consumer spending/confidence.

When these are performing well consistently Central Banks tend to hike rates, the US jobs market is at a record low and we find out this on the 1st Friday of each month when NFP is announced.

The Dollars uncertainty under Trump is weighing it down, he comes with a lot of turbulence that stops investors buying the Dollar long term, if Obama was still in power with this data being produced and the Federal Reserve rate hiking then I would guess that USD currency would be a lot stronger against its other counterparts.

USD Key Focus is – Inflation and Wages

 

GBP

Pre Brexit worries about the economy sinking into a recession after Brexit has disappeared and the economy has been producing some great data since the Brexit announcement back in June 2016, the currency is slowly getting back towards pre-Brexit levels. So how can we tell signs of hawkishness in the GBP. The Bank of England raised interest rates back in November 2017, in their recent meeting in March, 2 of the 9 members voted for a rate hike immediately, where as the other 7 chose to hold them, Mark Carney did signal that May could be seen as the next rate hike, with the market expecting another one in November, by the looks of the market this is starting to be priced in.

Unemployment at a 42 year low, inflation running at 2.5%, above the 2% target set by the BoE, Wages running at 2.7%, GDP still growing, all points towards a resilient economy, so what threatens the GBP currency strength, further tensions with Russia potentially getting out of control and also that magic word Brexit – any hinderance in negotiations could see the GBP fall back, which could provide some good buying opportunities.

 

EURO

So the EURO Rally started back in April 2017 just after the first round of French elections, like the GBP it has been producing consistent and steady data for a period of time. Which has caused an increase in strength. The ECB (European central bank) has begun tapering, which they have been reducing their Quantitative Easing programme since last year. Which shows signs of hawkishness, but at the moment there is no real hints at when their will be an interest rate rise. Which has slowed it down lately, Mario Draghi (ECB President) tends to be dovish most cases then not.  We have recently had elections in Italy that still has no government formed from it, which causes more uncertainty as Italy are the 4th largest economy in Europe, Italy voted for the anti establishment parties that aren’t very warming to remaining in the EURO, so the future of Italy remains unclear for now.

Finally these trade wars could potentially impact the Euro, the Euro currently has a 25billion Euro a month surplus on trade, so if this reduces on the back of tariffs then it leaves a hole in the Euro balance sheet.

The one area the Euro is lacking in terms of data is inflation running at around 1% of a 2% target,  in order for inflation to increase we could see a further weakening of the currency.

So all in all the Euro has a lot of positive but also negative things going on at the moment, the positive signs have mostly been price in, so a correction in the Euro is likely until we get some trend changing news that will change its outlook.

 

JPY

In times of uncertainty you will see the JPY strengthen, whether its Dollar weakness, world economic outlook being negative, political uncertainty or stock markets falling, but overall the JPY economy is not seen as being strong at the moment, It is lagging behind on the Central bank targets on inflation, export business is decreasing, household spending. So we will need to see a huge pick up in these before the JPY decide to start raising interest rates. They currently have a Negative central bank base rate of -0.10% this is to deter investors from buying their currency, to ensure it stays weak so their export business can improve.

Understand current world economic sentiment before entering JPY trades as they are fast moving pairs.

If USD is Strong, JPY can be weak if equities are also strong

IF USD is strong JPY can also be strong if equities are weak

Vice Versa if JPY is strong,

The Central Bank are looking to stay dovish at the moment with the economy and shows no sign of change until the data starts producing signs of it. Even in this time Governor Kuroda wouldn’t want JPY getting stronger then current levels

 

CAD

Currently the Bank of Canada are in a rate hike cycle with 3 hikes coming in the last 10 months, shows signs that the Canadian economy has improved, Trade Balance (difference between imports and exports) have suffered slightly bringing a monthly deficit mainly down to their currency strengthening so much on the back of these hikes. Oil prices have helped cushion that blow with Oil prices now at 3 year highs

Oil and CAD are closely correlated for day to day movements and they are currently both in strong bullish trends, if war breaks out and tensions increase between USA and Russia then Oil prices could rally causing CAD to strengthen also.

One thing that has weighed down CAD in recent times has been NAFTA (North American Free Trade Agreement) with Donald Trump calling this unfair for America he ripped it up. 75% of Canadian exports go to America, so they need USA to continuing being a strong trading partner with them in order for their economy to remain strong, In the last week or so their has been more talk of progress on NAFTA negotiations. Once a full agreement is in place this looks favourable for CAD to remain bullish.