Make money from a strong pound at Marks and Spencer and Majestic Wines

IBTimes Video Link (click below):

Edmund Shing: Make money from a strong pound at
Marks and Spencer and Majestic Wines

This week, pound sterling hit its highest level against other major world currencies for over seven years (figure 1), judging by the Bank of England's Pound sterling index.

Figure 1: Trade-weighted pound back at highest since mid-2008

Source: Bank of England

This latest surge has been driven by the political certainty given by a Conservative general election victory, plus a following wind for the UK economy as:

• Unemployment continues to fall
• Retail sales surge higher (+4.7% year-on-year in April 2014)
• The domestic property market resumes its upwards march.
• Pound posts big gains against the euro and Aussie dollar

Of the major world currencies, the pound has gained against virtually all of them so far in 2015, save the Swiss Franc (figure 2).

Figure 2: Pound makes big gains against the euro and Australian dollar in 2015

Source: Bank of England

The biggest move has been the near 10% jump against the euro (from €1.29 at the beginning of 2015 to €1.41 currently).

The pound has also posted useful gains against the Australian dollar and Swedish crown too, with only the Swiss franc doing better this year so far.

Why should sterling stop here?

As long as the British economy keeps steaming along and the European Central Bank continues with its programme of bond buying (so-called Quantitative Easing, or QE), we could well see sterling return to the heady heights of €1.50 reached on several occasions between 2004 and 2007 (figure 3).

Figure 3: Pound hit over €1.50 several times 2004-07

Source: Bank of England

After all, the euro remains undermined by the ongoing Greek saga, while the extremist leftist party Podemos has made large gains in the local elections in Spain, underlining the political fragility of the established ruling parties across the eurozone and introducing yet further uncertainty.

Remember, if there is one thing financial markets hate, it is uncertainty – one area where the UK has a clear lead over its continental European cousins with a Conservative majority government now voted in.

How can we make money from a stronger pound?

One sector a canny investor should look at is the retail sector, given the majority of the goods sold on the UK high street tend to be imported. After all, a stronger pound means cheaper prices for imported goods, especially from the eurozone where the exchange rates have moved the most over recent months.

Food and drink is one big category where the UK imports a lot from the likes of Spain, France and Italy. Overall, the UK imports 40% of all the food consumed, much of it from our eurozone neighbours.

This should give a welcome boost to supermarket and upmarket food store chains such as Tesco (TSCO) and Sainsbury's (SBRY). I would focus more on two other retailers where I see potentially greater currency-related benefits.

The first is the venerable Marks and Spencer (MKS), which recently reported strong results. The retailer is continuing its slow transformation into primarily an upmarket food retailer along the lines of John Lewis's successful Waitrose chain.

Its Simply Food store format is enjoying a lot of success, and Marks and Spencer is focusing its new store programme on this format. While we may think fondly of the retailer as the nation's favourite purveyor of underwear, in actual fact food and drink now accounts for 57% of Marks and Spencer's UK sales.

The second retailer who could get a big profit boost from the stronger pound is wine warehouse chain Majestic Wines (MJW).

This £300m company is the UK's largest wine specialist merchant, with 213 stores selling wine by the case to 643,000 active customers.

French, Spanish, Italian and Australian wine imports in particular should all become cheaper in pound terms for Majestic to buy in the coming months and could deliver a useful profit bump.

Majestic should also see faster growth ahead following its recent acquisition of leading online business Naked Wines.

So go shopping for wine bargains thanks to that stronger pound, and why not add Marks and Spencer and Majestic Wines into your shopping basket while you are at it.

Put your money where your mouth is and buy the mighty US dollar in 2015

International Business Times Article + Video Link

What goes up tends to keep on going up. This is a good mantra for those wondering where to focus their investments now that 2015 is upon us.  

One of the most striking trends in financial markets over the past half-year has been the stunning ascent of the US dollar against virtually all other major currencies, including sterling, the euro and Japanese yen. For a UK-based investor, a simple investment in US dollars in mid-July when £1 bought you over $1.70 would have yielded a return of over 13% to date (Figure 1), with £1 only buying just over $1.50 today.

Figure 1: US Dollar Has Gained 13% Against Sterling Since mid-July 

Source: Bloomberg

Why the US dollar should remain top-dog currency in 2015

Of course, you might look at Figure 1 and take fright: why should you buy into a currency that has already done so well?

After all, it is not every day that a major currency pair like GBP/USD (sterling against the US dollar) moves by this much in a few months.

I see several reasons for the US dollar to make further gains against sterling:

1. The forthcoming UK general election in May introduces all manner of political uncertainty into the UK economic equation, making sterling a more unattractive currency to invest in until at least after the elections are held and the composition of the new government known.

The recent rise of the Ukip vote has added a big variable into the traditional calculation of likely voting outcomes: how highly will Ukip poll come May and could it prevent either of the two traditional parties of power gaining an absolute majority?

2. If the Conservative Party is elected, then Prime Minister David Cameron is likely to proceed with an EU membership referendum. If the Labour Party is elected, financial markets could well react negatively to a less business-friendly administration. Both outcomes would introduce yet further economic uncertainty and undermine the attractiveness of the pound.

3. The UK economy continues to slide closer to deflation with an inflation rate of only 1% and falling, dragged down by the eurozone, which has already registered a negative December inflation print of -0.2%. This will prompt the Bank of England to delay yet further any interest rate hike, again making sterling less attractive versus the US dollar, where an interest rate hike is likely to happen sooner.

How much more could the Greenback gain against the pound? Well a cursory glance at the long-term chart of the US dollar against sterling would suggest there is still some way to go to hit the US dollar's highs reached back in 2009 and 2010 (Figure 2).

Figure 2: US Dollar Can Still Go Some Way to Reach 2009, 2010 Highs 

Source: Bloomberg

Two easy ways to invest in US dollar exposure

Buying US dollars: The most obvious way to take advantage of this trend is to buy US dollars with pounds, particularly if you are thinking of going on holiday to the US sometime this year, as those they could become more expensive the longer you leave it.

I recommend ordering currency online via well-established, regulated institutions such as Best foreignexchange.com, which is offering a rate of over $1.50 per pound, or the currency websites of high-street supermarket chains such as Asda and Tesco, both of which are offering over $1.48 per pound with free click-and-collect services.

Buying US shares via an ETF: The second option is to invest in exposure to US stocks via an exchange-traded fund. Both the Nasdaq and S&P 500 indices remain in long-term uptrends despite the market sell-off of the past few days (Figure 3).

Figure 3: Nasdaq, S&P 500 Indices in Uptrend 

Source: Bloomberg

My preferred US stock ETFs, which you can buy in pounds on the London Stock Exchange (via your preferred stock broker), are:

1. The Powershares EQQQ Nasdaq-100 UCITS ETF (code: EQQQ), which carries heavy weightings to high-growth technology and biotechnology stocks
2. The iShares S&P 500 Minimum Volatility UCITS ETF (code MVUS), which carries exposure to US large-cap stocks, focusing on those stocks with lower risk.

Both of these ETFs will give you exposure to US stocks in US dollars with your pounds, and so should benefit not only from any continued gains in US stocks but also from further gains of the US dollar against sterling.

Happy dollar investing in 2015!

November 2014 Investment Outlook Preparing for a Year-End Rally

Stock Markets Set Up For Continued Rally

The six weeks from the beginning of September through to mid-October inflicted substantial damage on all major stock markets barring China (Figure 1), with developed markets falling 5-11% and the MSCI Emerging Market index losing 11% over the period. 

1. All Stock Markets Fell from Start-Sept. Except China

Source: Bloomberg

Fears over the strength of the global economy have dominated, with sanctions impacting not only the Russian economy but also those in the Eurozone, including that of the export powerhouse that is Germany. As a result, business confidence in Europe has suffered, putting the brakes on business investment and condemning the Eurozone to a no-growth economy (Figure 2). 

2. German Business Confidence Takes a Big Hit

Source: Bloomberg

However, this quick stock market correction has not taken into account a number of more positive economic trends, including the positive impact of lower oil prices on global consumers. 

Oil Price Plunge Boosts Consumption

The Brent crude oil price has fallen $30 per barrel from mid-June peak to around $85 per barrel currently. Of course, this is bad news for oil exporting countries including OPEC members and Russia. But according to The Economist, if this oil price were maintained, then oil consumers would benefit by paying an oil bill some $1 trillion lower.

The positive effects of this are already starting to be seen through rising US consumer confidence, thanks to retail gasoline prices falling 17% since the end of June to $3.14/gallon now. This should feed through to US GDP growth, heading closer to 3% annual growth based on current encouraging trends in the ISM Manufacturing survey.  

Seasonal Effects Now Turn Positive

In addition, after a turbulent month of October, seasonal trends now turn more favourable from November until the end of April. Historically, the VIX volatility index has peaked in mid-October, and then fallen until Spring-time, a pattern that it is starting to repeat now after touching a 3-year peak of 26 this month (Figure 3).

 3. VIX Volatility Index Calming Down

Source: Bloomberg
    

Prefer Growth to Value: Technology, Healthcare

With the US Federal Reserve edging closer to the end of the current round of Quantitative Easing (QE), this is typically a time to favour Growth as an investment style over Value. 

From an economic point of view, the Technology sector is a growth sector that should benefit from two factors: 

1. The improving growth in business investment, particularly in IT hardware & software; and
2. Improving consumer confidence in the crucial Christmas buying season boosting demand for consumer electronics.

Healthcare is a second Growth sector that stands to benefit from the continued growth in healthcare demand from emerging market consumers, and also from the increasing penetration of US healthcare insurance coverage as a result of Obamacare.
     

4. Technology & Healthcare Lead

Source: Bloomberg
        

Where to Focus in November

Aside from remaining convinced that both Technology and Healthcare sectors can move higher still, I believe that global bond yields will remain low for the foreseeable future given the continued savings glut, with investors seemingly unwilling to commit to risky assets and preferring the safe havens of government bonds and even cash. 

But, given that the best predictor of future 10-year returns from government bonds is the current bond yield, the 2.3% on offer in 10-year US Treasuries and the 0.9% offered by German Bunds seems very unattractive, with low-volatility dividend growth stocks more attractive in sectors such as Insurance and even Real Estate.

Finally, the US dollar seems set to continue to strengthen against most other currencies,  given that the European Central Bank and Bank of Japan seems set to do whatever they can to weaken their currencies, while the US Fed is putting an end to QE (at least, for now).
    

5. US Dollar Can Still Recover a Long Way

Source: Bloomberg

Video: What Does the Recent Market Volatility Mean?

Does the recent bout of financial market volatility mean that the bull market in stocks is over? Find out with this video!

Youtube: What Does The Recent Market Volatility Mean?

Happy viewing, 

Edmund

Twitter:                      @TheIdleInvestor

"Expert Opinion":     http://www.mindfulmoney.co.uk/wp/edmund-shing/

Global Markets: Are we at a Turning Point?

What to think about the Recent Bout of Emerging Markets-Led Volatility

Wow! This has certainly been an exciting few days for global financial markets, led by sharp weakness in various Emerging Markets (stocks, bonds, currencies). Figure 1 below highlights how the Russian Ruble and Turkish Lira currencies have both suffered extensive weakness against the US dollar over the last month or so, this weakness accelerating over the last few days.

1. Russian Ruble, Turkish Lira Weaken sharply vs. US Dollar

UK-based investors in Emerging Market stocks have been hit over January by the double whammy of falling stock prices and weakening currencies, as foreign investors flee Emerging Markets exposure for "safer" developed markets. As examples, the Templeton Emerging Markets (TEM) and JPMorgan Russian (JRS) investment trusts have suffered drops in excess of 10% since the beginning of November 2013 (Figure 2):

2. Emerging Markets Investment Trusts Take a Battering

EM Tough Also as Export Markets

Now, Emerging Markets have not only been tough for foreign investors, but also in business terms for a number of UK-listed companies too: today, the drinks giant Diageo (DGE) announced results, and included the comment that a number of emerging markets had been difficult for them (including Nigeria and Eastern Europe), particularly in their beer division. Rather predictably, their share price has taken a tumble today, down around 5% on this disappointment (Figure 3). 

3. Diageo Also Catches an Emerging Markets Cold

So, should we as investors call time on the bull market in stocks that has been such an enjoyable rise up since November 2012? Or are we at risk of "throwing the baby out with the bathwater", overreacting to a number of problems in Emerging Markets that will not necessarily spell the end of the bull run in Developed Market stocks? 

Putting This in a Longer-Term Context

Let's take a deep breath in, and consider where we find ourselves today in this bull market trend. 

Exhibit A: The Value Line Arithmetic index (VALUA). This index represents the stock price evolution of the average US stock, without reference to size of company. So in this index, a mega-cap like ExxonMobil has exactly the same weight as a US small-cap with a market cap a fraction of Exxon's. And what do we conclude from Figure 4? That the bull market for the average US stock is still intact, in spite of the recent mini-pullback on the back of further Federal Reserve tapering of bond purchases (from $85bn monthly to $75bn monthly in December, and now from $75bn to $65bn monthly). 

4. No Breakdown in the Average US Stock's Bull Run

Exhibit B: The FTSE UK SmallCap index (ex investment trusts: SMXX).UK smallcap stocks  continue to outstrip their mega-cap UK brethren by some margin, and also maintain the bullish uptrend that has been in place since late 2012 (Figure 5): 

5. UK SmallCaps Still Close to Multi-year Highs

Exhibit C: The US VIX Volatility index (VIX). The so-called "Fear Index" has spiked higher in recent days as a result of this emerging markets turmoil, but has still not reached the peaks touched in 2013, never mind the scale of the volatility spikes in 2012 or 2011 during the Eurozone peripheral countries crisis (Figure 6).  

6. The VIX Volatility Index Is NOT at Worrying Levels, At Least Not Yet...

Even excluding the 2008 global financial crisis, the VIX index has averaged a reading of over 19 between 2000 and today. So the current reading of 17.4, while elevated with regards to the mid-January level of 12.5, is still well below the long-term (ex-crisis) average for this stock market volatility measure.  

  

I could go on citing other indicators that do not exhibit any real signs that the uptrend in risk assets is over yet, but I think you all now get the general picture. So far, the clouds on the financial markets horizon do not look pregnant with heavy rain, but rather our investment enthusiasm is being dampened by what seems more like a light drizzle. 

How Will We Know If Matters Turn More Serious? 

Of course, the situation can always change for the worse, and we should always remain alert to such a possibility. I would never deny that there are a number of structural concerns that affect various large emerging economies such as Brazil, Russia and Turkey. However one interesting snapshot that we should watch for clues as to whether this current market pull-back develops into something potentially more concerning is the relative performance of various European stock sectors. 

Normally, during a stock market correction phase, as the market falls so-called "defensive" sectors (with more predictable and less economically-sensitive sales and profits) should outperform more cyclical sectors (with less predictable and more economically-sensitive business models). 

However, thus far this generic financial markets script is not being followed! Figure 7 illustrates that the three worst performers of the 19 industry groups in the STOXX Europe index are all defensive (Personal Goods, Retail and Food & Beverage), the complete reverse of what one should normally expect... And the industry leaders over this 3-month period have actually been cyclical sectors like Travel & Leisure (e.g. airlines), Autos and Construction. 

7. "Defensive" Sectors Have Generally Fared Worst As Emerging Markets Dropped

Perhaps we should not be so surprised at this contrary industry result, given that economic data point to the European economy picking up rather nicely right now, led by none other than good old GB and Northern Ireland!

So what am I looking at right now? 

Without going over the top, I am cautiously adding to my positions in SmallCap stocks where the price trends remain stubbornly positive in the face of a weakening FTSE-100. SmallCaps on my personal radar screen that are breaking new highs include:

Alumasc (ALU), Centaur Media (CAU), Charles Taylor (CTR), Headlam (HEAD), Hogg Robionson (HRG), Quindell Portfolio (QPP), Safestore (SAFE), St. Ives (SIV) and Xchanging (XCH). 

I leave you to do your own research on these smallcap names to decide if they are worthy of your particular investment attention too!

Signing off for now, 

Edmund

Twitter: @TheIdleInvestor

"Expert Column": http://www.mindfulmoney.co.uk/wp/edmund-shing/

Global Financial Market Trends - Animated Slideshow with Audio Commentary

For my views on key global financial trends, watch this 4-minute video clip, which goes through a short slideshow of key market charts, together with an audio commentary.

I hope you find this helpful,

Edmund

Greenback and Loonie winning the forex race, but will the Yen or Aussie get the wooden spoon?

Long-term FX winners and losers

While I love looking at stocks and shares, particularly since November of last year which has been kind to the equity investor, I have also been tracking a combination of different macro trends have thrown up a number of clear, long-term trends in FX. 

The Greenback: Setting off on a bull run!

A backdrop of improving macroeconomic trends (unemployment, housing, retail sales) combined with the belief that the Fed will finally start to put a very gentle brake on their rash of bond buying, is the backdrop for a strengthening US dollar. The US dollar index (chart below) has responded to these trends by rocketing up the currency charts over the last few weeks, adding 5% in this very short time window.

US Dollar Index Hits a 12-Month High!

While you may start to worry about potentially buying the US dollar at the top, note that there is still a fair way to go before the US dollar index reaches multi-year highs...

5-Year Peak For USD Was Around 89, vs. 84.6 now

The Loonie is also worth watching...

Now while the Canadian dollar has been a strong currency for quite a while now, note that the recent trend for the Loonie has been a weakening rather than strengthening, at least against its Southern neighbour:

US Dollar Has Strengthened Against CAD Since Sept. 2012

But that being said, the Loonie should be aided by stronger Canadian export performance (thanks to current FX weakness) and of course the follow-through from a stronger US economy (the Canuck's biggest trading partner by far) and higher oil prices (they are a big oil producer thanks to oil sands). 

Note that the Canadian bank CIBC is predicting that the Loonie could return to parity against the Greenback by the end of 2014 (CIBC's Monthly FX Outlook - June 2013), suggesting that it should remain a stronger currency within the G10 currencies (the 10 most heavily-traded currencies). 

Can the Aussie Dollar Slide Even Further? Could be...

The two key drivers for a weaker Australian dollar have been: 

(a) a clear slowing in the Chinese economy growth rate, impacting demand for Australian-sourced commodities like iron ore, coking coal and copper, and 

(b) The Reserve Bank of Australia cutting interest rates, now down to 2.75%:

Australian interest rates have been cut several times recently

Now hardly surprisingly, given the worries over the Chinese slowdown impacting Australian commodity exports and lower interest rates also making the Aussie dollar less attractive, the AUD has slid quite dramatically against most currencies since the beginning of April this year. 

However, looking at a 5-year chart, it would seem evident that the AUD could yet weaken quite a bit further, since the 5-year low for AUD/USD was 0.62 versus 0.92 now. 

A very long way for the Aussie dollar to go to plumb 5-year lows

I think that the major risk for the Australian economy (and by extension its currency) remains that of a greater-than-anticipated slowdown in Chinese economic growth. For now, financial markets seem to be happy with the idea that the Chinese government will slow the economy just enough to curb inflation and manage the transition from an investment-led to consumer-led economy. I would suggest that this perception could change quite quickly, and potentially lead to the AUD weakening further from here. 

Abenomics continues to weigh on the Yen

A key plank of the Japanese government's reflation effort for their economy rests on weakening the Yen sufficiently to stimulate the country's car, industrial and technology exporters to drive growth. The Bank of Japan seems similarly determined to continue to add monetary stimulus in the form of buying financial assets (not just bonds, but potentially also stocks), all of which argues for a yet weaker Yen. 

After a short period when the Yen reversed its weakening trend against all other G10 currencies, we are now back to a steadily weaker Yen once again as the BoJ are expected to expand their Quantitative Easing program, just as the US Fed are supposedly going to start pulling back gently on theirs. 

Yen has resumed its weakening trend against the US dollar

Conclusion: USD and CAD set to gain ground, weaker AUD and JPY in prospect

I think there will be a number of opportunities in the months ahead to go long both the USD and CAD against the AUD and JPY, extending the trends that have already been in place for some time now. Never underestimate the ability of a financial market trend to persist for longer than you can possibly imagine...

Edmund

Post BoE/ECB Markets Landscape: Small-caps, US Dollar show relative strength, Commodities still laggards

BoE, ECB lower for longer?

Following the forward guidance given both by the new Bank of England Governor Mark Carney, and President Draghi of the European Central Bank at their respective central bank rate-setting meetings, what can we divine from the reaction of various financial markets?

First off, no bones about it - both the Bank of England and the ECB remain fully engaged in supporting the fragile economic growth rates seen in Europe (Bloomberg - ECB signals prolonged low rates). We have been recently reminded of how fragile any economic stability is across the Continent by the volatile reactions to the resignations of 2 ministers in the Portuguese government, plus the emergence of cracks in support for the incumbent Italian government. Notice how the Portuguese bond yield surged beyond 7% in short order in response to this renewed political volatility, triggering reactions across the whole of Europe. 

Portuguese 10-year bond yield spikes up to 7+%

Let's have a quick tour of the various financial markets, to see where there are enduring trends to be identified. 

FX: US Dollar rules

As far as currencies go, the strength of the US employment data on Friday with 195,000 new jobs created in the month of June, plus upwards revisions to the jobs data for both April and May (BLS - US employment situation, June 2013), supported the US dollar, with the US dollar index (DXY) responding by making a new 1-year high.

US Dollar index breaks a new 12-month high

Sterling has been a major loser in contrast, with GBP/USD dipping below $1.50 following the Bank of England statement. 

Bonds: Still making new lows

The bond markets have not managed to reverse their bearish trend, with bond indices still sliding lower following the various central bank statements and the US economic data releases on Friday. Not yet time to dip back into buying government bonds, just yet then. 

US Treasury bond ETFs hit a new 12-month low on Friday

Commodities: Industrial metals, foodstuffs still weak as well

Another area not yet ready for buying is the commodities space: despite sizeable slumps in industrial metals, precious metals, and foodstuffs over the last 12 months, there has not yet been any discernable change in underlying trend... The mining sector continues to mirror this commodities malaise, still the worst-performing sector in the European stock market in the year to date.

Sugar dives ever lower

Don't try to catch this European Mining falling knife

Stock Markets: Small-caps holding up best,
No reason to return to Emerging markets yet

Looking at the UK and US stock markets, the outperformance of small-cap stocks continues to surprise me. However, they remain of course a good play on improving economic momentum in both countries, particularly relative to other areas such as Banks (which tend to be large-caps) or even Emerging Markets. Within Asian equities, Japan clearly remains the place to be, with the Baillie Gifford Japan investment trust (BGFD) returning to within a whisker of its 2013 peak on Friday.

US S&P Smallcap 600 Index Breaks New Highs

While UK Small-caps also look ready to return to recent highs

However, within European large-caps I would be wary of the Banks sector which has broken its 200-day moving average, while Emerging Market equities remain firmly out of favour. 

No inflection point yet for Emerging Market equities

And European Banks also look vulnerable

Conclusion: Small-Cap stocks look good, but beware Banks, Commodities

Stay long UK, US small-caps, and housing-related areas including Lumber (but not US homebuilders, which have already benefited from enormous revaluation). Stay long Japanese shares too, although the Yen will likely weaken further against the US dollar.

In contrast, there is a long list of financial assets to avoid or even short outright potentially: Emerging Market equities, European banks, industrial metals like copper and the related Mining stocks, and European Oil & Gas stocks. This is not to mention most commodity foodstuffs like sugar and coffee, which continue to touch new 12-month lows. 

Good luck for Monday and hope you are profiting from the belated arrival of Summer in the UK and France,

Edmund

Oz no longer great nor powerful

Sell the Australian dollar, Australian stock market?

Chart 1 below clearly the break in the 2-year uptrend in the Australian stock market since mid-May of this year. A simple reading of this chart would suggest that the former support level around 4,900, now decisively broken, becomes resistance for any rally to the upside. With the ASX/200 index currently trading at 4,834, this would suggest that there is certainly a lot of risk in holding Australian currency or shares right now.

Chart 1: Australian ASX/200 uptrend decisively broken

Source: Bigcharts.com

Chart 2: Australian dollar in downtrend against USD

Equally well, the strengthening trend of the Aussie dollar agains tthe US dollar has also reversed, with the Aussie dollar close to a 12-month low (Chart 2).

What fundamental reasons can we put this change of trend down to?

1. China - a slowing rate of growth points to slower growth in commodities demand from Australia, in both industrial metals and coal. 

It is hardly surprising to see that the European Basic Resources sector (miners with Australian assets such as BHP Billiton and Rio Tinto) has been the worst-performing sector in the year to date. Note that the lastest HSBC manufacturing Purchasing Managers Index was again below 50, indicating contraction rather than expansion in the Chinese manufacturing sector as of June. 

2. The Royal Bank of Australia is expected to cut interest rates in the near future to support the Australian economy; this however should lead to a weakening currency, other things being equal. 

3. Political landscape shifting, with Julia Gillard ousted as Prime Minister by Kevin Rudd, introducing an additional element of uncertainty and thus volatility. 

The noted macroeconomic strategy service The Bank Credit Analyst have come to a similar conclusion, given the increasing reliance of the Australian economy on mining exports (72% of total exports as of 2011/12). Australia-a-fading-star

Conclusion: In currency, prefer the USD, Euro or GBP to Australian dollar, at least until the Royal Bank of Australia cuts interest rates aggressively. In equities, the ASX/200 looks more likely to fall than rise from current levels, and looks set to continue to under-perform other developed stock markets. I continue to prefer the Japanese stock market given the growing evidence that Abenomics is having a positive effect finally on the Japanese economy. 

The Bank of England Doing a Sterling Job?

14/06/2013

The Bank of England Doing a Sterling Job?

Despite the seemingly singular focus of financial markets on the Fed and "Will They, Won't They (start withdrawing Quantitiative Easing in September)", I have been somewhat surprised by the turnaround in the Greenback over the last few weeks.

US Dollar Index - A Failed Breakout, 

Now Heading Back To 1-year Lows

Source: Bloomberg

The chart above would seem to suggest that the US has lost a lot of fans of late, backed up by the fall in US Treasury bond prices over the last month or so:

US 20+ Year Treasury Bond ETF Has Slumped

Source: Timetotrade

But before we get carried away bewailing the end of government bonds and a rising trend in bond yields, let's not forget that this is only a relatively short-term trend, and that it is not yet evident that bond yields are in a steadily rising trend (pointing to steadily falling bond prices given their inverse relationship).

UK Gilt Yields Still Very Low By Historical Standards

Source: Bloomberg

I have been pleasantly surprised by the better stream of economic newsflow coming out of the UK: unemployment continues to decline slowly but steadily, the recent monthly CIPS survey of services activity pointed to a stronger level of services activity than had been widely expected - according to Markit, the May figures highlighted a "sharper rise in activity as new business grows at fastest pace for over three years". 

UK Services Activity Growing Quickly

Source: Markit, ONS

So, What's The Trade?

I think the following is likely to be true:

1. the Fed WILL NOT start tapering or withdrawing monetary stimulus of any sort in September, or even at all over the rest of this year. The US economic data just is not strong enough to warrant it - the key ISM manufacturing survey for May points to contraction in US industrial activity (a 48.6 reading, below the 50 break-even level). 

2. The UK economy will continue to slowly improve, despite the best efforts of the UK government to torpedo economic momentum with their austerity policies. The Bank of England is key here in continuing to support the economy, the vital housing sector remains relatively buoyant - helping boost consumer confidence - and you might even start to get some results from the boost to business lending coming through sometime soon. 

3. The rising trend in trade-weighted Sterling looks likely then to continue, so long as this more positive economic trend in the Albion continues...

Trade-Weighted Sterling On The March Upwards Within Long-Term Range

Source: Bank of England

All in all, Cable (Buy Sterling, Sell US Dollar) looks good to me at this point, as it seems to have broken above the threshold of a double bottom formation on the chart below, suggesting further potential gains ahead:

GBP/USD Heading Back towards $1.60+?

Source: IG Group

Bon weekend to all, fingers crossed for a good trading week from Monday!

Edmund