It's Sink Or Swim For Sterling
MarketPulse | Sep 10, 2014 06:55AM ET
This morning Euro equities are on the back foot, taking their lead from the slide in Asia and North America in the overnight sessions. Euro bourses are on the verge of forgoing all recent gains earned after ECB's Draghi surprise rate cut last week. Not helping investors risk appetite is the surge in Scottish independence support a week before going to the polls coupled with fresh European sanctions against Russia. Yesterday, European governments approved a new round of sanctions against Russia; they have yet to be implemented as Euro leaders continue to weigh up the progress of negotiations between Russia and Ukraine before fully unleashing them. Ukraine this morning indicted that 70% of Russian/Pro-Russian have actually left their region. However, all the above are good enough reasons to keep investors on the edge.
Sink or Swim for Sterling
With the Scottish vote narrowing has managed to put both sterling and the UK's FTSE 100 under pressure. The index is probably the most "global" of equity indexes in the world (50% of company profits are offshore) and one would expect FTSE to rise as GBP falls. Currently, they seem to be trading in tandem, which would suggest that most UK assets are facing a risk premium problem. A "yes" vote could lead to a UK snap election and a close "no" vote the issue is hardly not going to go away. Market consensus believes that GBP has probably fallen a bit too fast (£1.6100). It's trying desperately to edge away from it's 10-month low (£1.6065), but currently it's looking like a "dead cat bounce." It received some support from better than expected UK industrial production data yesterday (+0.5% vs. +0.2%), coupled with BoE's Governor Carney indicating that interest rates are likely to rise next spring has provided some relief for a plummeting currency. Nevertheless, the pound's upswing is seen by many to be temporary. The "too far too fast rule" will only allow those individuals who missed the boat to get on, and those miserably offside positions to mitigate their losses. Until there is some certainty surrounding Scotland's future, sterling will remain at the mercy of capital markets.
During Canada's Quebec crisis it took some time for the loonie (CAD) to find rock bottom (USD/CAD $1.4243 01/19/95) and longer to find its fair value even after political clarity. Sharp swings will be the order of the day in the UK markets. Two-week volatility in GBP/USD (14-day expectations) is trading around +12.6%, up from +6% just one-week ago. Prices for sterling remain relatively wide and sometimes rather illiquid - like trading in a vacuum. No matter the outcome, either yes or no, volatility provides opportunity, but trading discipline is of the utmost importance during conditions like this.
Get The News You Want
Scotland has never been so important: Below is a list of the Scottish polls timetable that remain. If nothing else, the market should be expecting much price volatility around these releases.
- September 11: Survation online poll for Daily Record
- September 14: YouGov for Sunday Times
- September 17: Final YouGov for the Sun and a Survation online poll via Scottish media outlet
France fudges forecasts
Europe's second largest economy France, lowered its growth forecast again earlier this morning and warned that the country requires more time to bring its public deficit back in line with EU rules. The economy would grow +0.4% in 2014 compared with +0.5% forecasted only a few week's ago and by +1% next year, down from a +1.7% projection. The public deficit is expected to be around +4.4% of GDP rather than the +3.8% expected. Further spending cuts tabled for next year hopefully will push this down to +4.2% and then below +3% in 2017. This is just further proof that Hollande and company is fighting an up hill battle with the country's low inflation and lack of economic growth (stagnation). It's no wonder that France has been the most vocal on the EUR's value - a weaker currency would obviously help.
Reasons for EUR's support
The single unit seems to be well supported close to its yearly lows (€1.2945), despite all of Draghi's efforts from last week. There is again upward pressure from EUR/GBP (€0.8040) that has emerged on the back of a suspect Scottish sovereignty vote. Also aiding the EUR is the current unwinding of EUR funded "carry" trades that has been driven by a suspect equity market, rising US yields (next week market is looking for a "less" dovish Fed) and surging option vols. One could also throw in less tension between Russia and the Ukraine as providing EUR support. Nevertheless, the EUR's immediate upturn has yet to break any significant resistance levels on the topside (€1.3000 for starters). This would suggest that the market does want to be caught offside by being too "long" EUR's at the bottom as investors continue to focus on the EU/US rate spreads for currency direction. Current market consensus believes in selling EUR's on rallies until proven wrong.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.