Run Euro Run !

The euro’s rally may have only just begun.

While the European Central Bank made few changes Thursday to its forward guidance and Mario Draghi said that policy makers were still waiting for wages and prices to match the region’s improving economic growth, the common currency rallied to its highest level in nearly two years.

It’s the best performer among Group-of-10 currencies this year and could still have further to run with the bank likely to announce the scaling back of its quantitative easing program in either September or October.

“It’s an armor-plated rally and it won’t stop,” Peter Kinsella, a London-based senior foreign exchange and rates strategist at Commonwealth Bank of Australia, wrote in a note. “Everything speaks in favor of further EUR appreciation — increasing portfolio inflows, changing monetary policy, improved political risks.”

Increased hawkishness from the central bank, spurred by Draghi saying that reflationary forces had replaced deflationary ones on the continent, has helped the euro rally from lows last seen near the start of the millennium. Investors expect the ECB to start tapering in the new year and are pricing in a 10 basis point rate hike by September 2018.

At the same time, political risks have largely dissipated. The victory of market-friendly Emmanuel Macron in France allayed fears after a populist wave swept through the European Union following the Brexit vote and the election of Donald Trump as president of the U.S. Economic growth has also picked up, helping to buoy investor prospects.

The euro broke through $1.16 after Draghi said that the currency’s recent re-pricing had received “some attention,” without specifically saying he was concerned about its strength, at the press conference following July’s ECB decision. That reference helped boost the shared currency, while European bonds rallied following the meeting led by those of Spain and Portugal.

Mario Draghi “essentially did not push back on the market pricing, which was the key point,” said Jordan Rochester, foreign-exchange strategist at Nomura International in London. “The Fed was moving more aggressively in terms of their monetary policy while other banks were still easing. All that’s come into reverse now,” he added, referring to the Federal Reserve’s recent rate hikes.

The euro advanced 0.1 percent to $1.1642 as of 8:49 a.m. in London, having touched $1.1677, its highest since August 2015. The currency has climbed about 11 percent this year, partly on speculation that a tapering of bond purchases is drawing closer. It traded near its highest versus the pound in eight months with one euro worth 89.59 pence.

Nomura currently forecasts the euro at $1.15 by the end of the year. “In the short-term we’re overshooting and I wouldn’t fight it,” Rochester said.

For some analysts, the only thing that can stop a prolonged euro surge is events on the other side of the Atlantic. That could come in the form of progress of U.S. tax reform, according to Rochester.

“One factor that might stop the euro rally from here is a repricing of expectations for the Federal Reserve,” said Andrew Cormack, a London-based money manager at Western Asset Global Management. “There is so little priced for the Fed now any upside surprise in the data could see this reverse.”

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Why People Avoid Nordic Banks

Nordic banks, long considered among the safest in the world, are losing their appeal as an investment target as lenders further south start to look more attractive, according to PineBridge Investments, a multi-asset manager that oversees about $85 billion.

Graeme Bencke, the portfolio manager who heads equity strategy at PineBridge in London, says the circumstances that made banks in Sweden, Denmark, Norway and Finland a “good investment in the post-crisis period” no longer exist.

“Now, we’re in more of an upswing and a lot of the European banks that had been in trouble, southern European in particular, are now starting to see an incremental improvement,” Bencke said in an interview in Stockholm. “So there’s a much bigger inflection point in valuation in those banks than there is in the Nordics. That’s kind of keeping us away from the Nordic banks.”

Investors have so far stayed loyal to banks in the Nordic region, where prosperous and stable economies have been relatively unscathed by the wave of financial shocks to have hit since 2008. Nordic lenders have also tended to take a more cautious approach on capital adequacy. But that investor loyalty has driven up valuations, potentially leaving less room for price gains.

Sweden’s four biggest banks are all in the top half of Bloomberg’s index of European financial stocks, based on price-earnings ratios for next year. Nordea Bank AB, the biggest Nordic lender, has seen its share price soar about 50 percent over the past 12 months, compared with a roughly 35 percent increase in the Bloomberg index.

Meanwhile, banks further south are starting to emerge from years of trouble. In Spain, Banco Santander SA’s recent takeover of Banco Popular Espanol SA (a key test of European resolution rules) shows southern Europe’s banks are successfully dealing with their weakest links. (Though Italy is still trying to figure out how to handle its struggling banks.)

“Southern European banks in particular have a lot of problem assets which had been aggressively marked on the books,” Bencke said. “These banks are now able to offload some of those problem assets at losses that are smaller than the losses they’ve already taken. So we’re starting to see again, assuming the recovery continues, it’s quite a good inflection point for those banks with more difficult assets. Which is something the market’s been waiting for for years.”

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UK Election : What Could It Mean To You.

U.K.’s citizens have just voted their next set of Parliament members.

What were the results and why should traders care? Here are a couple of answers:

Why did Theresa May call for snap elections anyway?

Back in mid-April, Prime Minister Theresa May called for a snap election despite her promises to wait for the May 2020 scheduled elections. The plan was to capitalize on her (and her party’s) popularity and strengthen their numbers ahead of the crucial Brexit negotiations.

Back then the Conservative Party held 330 seats, just a smidge above the 326 required to form a majority in the 650 seats of the Lower House. The Labour Party came in second (229 seats), followed by the Scottish National Party (54) and the Liberal Democrats (9).

The pound rallied at her announcement as market players and their cats had bet on a landslide win for the Tories, with polls attributing double-digit leads against the next party.

Did May’s gamble pay off?

Not even a little bit. In the weeks that followed, May’s hard stance on Brexit, two terror attacks in the U.K., a few REALLY unpopular bits in the Conservative Party manifesto, and hard campaigning from her opponents have pulled the Tories’ lead down to uncomfortable levels.

Fast forward to Election Day and now May’s party has…more regrets than seats in the Parliament.

With a voter turnout of 68.7% – the highest since 1997 – and only one more constituency left undeclared, Theresa May’s Conservative Party is expected to snag 318 seats in the Parliament, 12 fewer than when she called for the elections.

The Labour Party is expected to get 261 seats (+31 seats) while the Liberal Democrats (12) and Democratic Unionist Party (10) also added to their numbers. The Scottish National Party (35) also lost seats, though.

What does this mean for the government?

In a word, trouble. With no party reaching parliamentary majority, the U.K. officially has a “hung Parliament.”

Basically, having a hung Parliament means that it will be harder for the MPs to reach decisions. But as leader of the party with the most seats, May will be given a choice if she wants to (a) form a coalition or (b) run a minority government.

Forming a coalition means teaming up Survival-style to get the required 326 votes. In this scenario the Tories would sign a formal coalition as PM David Cameron did with the Liberal Democrats in 2010. The Tories would have to give up control, though, and likely give Cabinet positions to the other party.

Or they could choose to run a minority government and enter into “confidence and supply” agreements, wherein a small party or independent MPs will “supply” their votes on bills and “confidence” votes in exchange for progress for their pet causes.

What does this mean for Brexit negotiations?

More trouble. Remember that May wanted to reinforce their numbers to improve her bargaining position with the EU and increase chances of a “good deal” for Britain. If you recall, she has said that “no deal is better than a bad deal.”

But with the Conservative Party not even getting majority, things just got a lot harder for May. Not only does she have to soften some of her stances (not all Tories are in favor of a hard Brexit), but she might have to scrap some of her plans altogether.

The lack of majority could also lead to delays in the Brexit negotiations. Formal talks was scheduled to start on June 19 but already EU’s Chief Brexit negotiator Michel Barnier tweeted:

“Brexit negotiations should start when UK is ready; timetable and EU positions are clear. Let’s put our minds together on striking a deal.”

Recall that Britain has already officially triggered Article 50 of the Lisbon Treaty. This means that they have two years to negotiate their way out of the EU. Tick tock.

Any other surprises?

As you can see on the chart above, Nicola Sturgeon’s Scottish National Party also lost bigly. More importantly, Alex Salmond – Sturgeon’s deputy, mentor, and a key SNP member, has lost his seat in Gordon.

This means that we won’t see a second Scottish referendum anytime soon. Already Sturgeon has shared that she would “properly think” about whether to press ahead with Referendum 2.0 after the Tories enjoyed their best performance in Scotland since 1983.

Nick Clegg, THE leader of the Lib Dems in 2010 and former Deputy Prime Minister, also lost his seat in Sheffield Hallam to Jared O’Hara of the Labour party. Yikes!

How did the markets react?

The pound took its hardest hit when exit polls – which have been good predictors of actual results – pointed to a hung parliament.

The currency also dropped by its sharpest since the EU referendum and made new lows while the final tallies were shaping up. However, it also saw retracements at the start of the London session.

FTSE 100, which includes companies that would profit from a weaker pound, opened higher today. Meanwhile, FTSE 250, which has more local companies, are marginally lower on the day.

It’s also interesting to note that utilities companies are among the biggest winners today. One possible reason is that the lack of majority would mean that the Labour Party won’t likely push through with nationalizing them while Theresa May can’t cap their bills either.

What now?

PM May revealed that she has seen the Queen and has formally asked permission to form a government.

Apparently, she’s now teaming up with the Democratic Unionist Party (DUP) to form a coalition in time for the start of Brexit negotiations AND the opening of the new Parliamentin 10 days.

Thing is, the DUP isn’t a fan of a “hard Brexit.” DUP founder Arlene Foster once shared that “No one wants to see a hard Brexit,” adding that “no one wants to see a hard border.”

This means that, unless May convinces Foster and her gang to come over to the “hard” side, then we’ll likely see a toned down version of May’s initial Brexit plans.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

UK OK ?

The U.K. could suffer another ratings downgrade after a General Election led to a hung parliament, Moritz Kraemer, sovereign chief ratings officer at S&P Global, said on Friday.

The U.K. lost its triple A rating after the country voted to leave the European Union in June of last year. S&P said at the time that it was worried the decision would lead to a deterioration of the U.K.’s economic performance and institutional framework.

Kraemer said on Friday that the latest election outcome proves the rating update was correct and further ones could be on the way.

“We have the outlook on the ratings still on negative indicating that further downgrade or downgrades could be in the wings going forward,” he said.

“This depends pretty much on the further outcome of the Brexit negotiations and the reality that the U.K. will face outside the EU, which is still uncertain,” Kraemer added.

Brexit talks, which were due to begin in a couple of weeks, are set to be delayed until the U.K. has a new government in place. The associated uncertainty could hurt the country’s economy by further derailing investment decisions.

Kramer noted that this was the second unnecessary referendum/election in the U.K. “This is quite a track record,” he said.

The upcoming decisions of U.K. lawmakers will be closely watched. Kathrin Muehlbronner, a Moody’s senior vice president and lead U.K. sovereign analyst, said via email: “Moody’s is monitoring the U.K.’s process of forming a new government and will assess the credit implications in due course.”

“As previously stated, the future path of the U.K. sovereign rating will be largely driven by two factors: first, the outcome of the U.K.’s negotiations on leaving the European Union and the implications this has for the country’s growth outlook; Second, fiscal developments, given the country’s fiscal deficit and rising public debt,” she added.

The outcome of the election also seemed to indicate that voters are tired of austerity policies.

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Short Pound

The pound is heading lower whatever the outcome of the U.K.’s elections, according to BlueBay Asset Management.

While the currency has rallied since the election was called, BlueBay began selling sterling last week, betting that the U.K. is set for a damaging Brexit process after the vote. Such a view chimes with Allianz Global Investors who recently used the rally in the pound to short it, and the median forecast of analysts in a survey, who see the pound declining about 3 percent by the end of 2017.

“We’ve literally gone short the pound at the end of last week,” said Mark Dowding, a fund manager at BlueBay, which oversees $55.5 billion. “We think you’re going to be facing a Brexit that to us looks like it’s going to be a hard Brexit.”

The pound, which tumbled following the U.K.’s decision to leave the European Union last June, has pared some of those losses as investors speculate that the earlier vote will ease pressure on U.K. Prime Minister Theresa May. The Conservatives are currently expected to comfortably win the June 8 snap elections with a large majority in Parliament.

Sterling reached a nine-month high of 1.3048 on May 18, and was at $1.2971 as of 12:06 p.m. in London on Tuesday. Even after rallying 5 percent in 2017, sterling remains about 13 percent weaker since the Brexit vote last June.

“There’s been this optimism in markets that a really big majority may actually strengthen Theresa May’s hand and make life a lot easier,” said Dowding, who predicts sterling could retest $1.20 toward the end of the year — an 8 percent decline from the current levels. “I’m not really sure it will make too much difference in practice.”

Tough comments from both sides of the negotiating table signal a choppy path ahead. Bundesbank board member Andreas Dombret said Tuesday divorce proceedings would likely be hard or very hard. Those comments came shortly after Brexit Secretary David Davis said the U.K. will walk away from talks unless the bloc drops its high financial demands.

“The most significant point that we would make on the U.K. is that, based on our discussions around Westminster and our discussions around Brussels, it feels that the deal that U.K. politicians think they can achieve seems an unrealistic pipe dream,” Dowding said.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Global Economy Slow Down

Global growth is expected to slow down significantly in the coming months as borrowing levels dominate in both China and Europe and “Trump-mania” is set to fade, a chief economist at Danish investment firm Saxo Bank said on on Monday.

“Our main global macro outlook still maintains that recession is more likely than not in the near future (12 to 18 months) based on the global credit impulse having peaked simultaneously with global inflation,” Steen Jakobsen, chief economist at Saxo Bank, said.

In a recent note, Jakobsen explained that the biggest “perception-versus-reality gap” in the market currently remains this risk of recession. He added that his company is not predicting a recession, but that its economic model does indicate a significant slowdown as “the large credit impulse from China and Europe in the early part of 2016 has not reversed to negative”, which it says should make the market conservative, risk averse push investors into U.S. fixed income.

“While the market at large sees less than a 10 percent chance of recession, we at Saxo – together with our friends at South Africa’s Nedbank – see more than a 60 percent chance,” he added in the note.

Europe is seen as the main region driving global growth, according to Jakobsen, beating the U.S. in the second and third quarters of this year. Jakobsen is not alone in this thesis, with a number of investment houses recently upgrading their outlooks on European stocks as fears recede on the rise of populism and polls indicate that centrist candidate Emmanuel Macron is likely to do well at the upcoming French elections.

Mike Bell, global market strategist at JPMorgan Asset Management, stated Monday that European stocks “look pretty cheap” compared to U.S. stocks. “What you’re starting to see now is that underperformance of earnings that you’ve seen since the financial crisis is disappearing,” he said. There’s been a fundamental acceleration in the euro zone economy, he also noted.

But, according to Jakobsen, Europe’s momentum is not followed in other parts of the globe.

“One thing is absolutely clear: Asia is not going to contribute anything in 2017 to growth. China is on total standstill,” Jakobsen said Monday.

“They don’t know what to do with (President Donald) Trump and I think Trump again showed his hand over the weekend that he is not to be relied on in terms of a set-out path for how they conducted themselves,” he added.

Trump and Chinese President Xi Jinping agreed during a summit last week to develop trade talks during the next 100 days to reduce the Chinese trade surplus with the U.S. They also agreed to increase cooperation to curb North Korea’s nuclear program.

Shortly after the meeting, Trump sent 100,000-ton USS Carl Vinson and U.S. Navy support ships to the Pacific as a show of force amid rising fears that North Korea will launch an intercontinental ballistic missile test in the coming days. Last week, Trump approved a missile strike on Syria, after an alleged chemical attack. Such a decision overshadowed the summit with his Chinese counterpart.

Furthermore, the main driver of U.S. equities seems to be hope, Jacobson added. The S&P 500 has reached historic highs since the new president took office on expectations that he will deliver massive tax cuts and infrastructure investments.

“A dominant part of the equity analysts sees a significantly higher S&P but it’s based on hope. Hope to me belongs in church on a Sunday,” Jakobsen said.

When economies slow up, people buy gold.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

New IPO

The Irish government’s sale of part of its stake in Allied Irish Banks Plc came a step closer last week. On Thursday in Dublin, the finance ministry appointed another group of banks to help in what could be the biggest listing on the London and Irish stock exchanges this year.

How much of AIB will be sold?

The government hopes to recoup about 3 billion euros ($3.3 billion) or more from selling 25 percent of AIB, which had to be rescued by the state during the financial crisis. Including the so-called greenshoe, about 27 percent of the lender could be sold. The government owns 99.9 percent of the bank, and Finance Minister Michael Noonan has said it may take a decade to return the bank fully to private hands.

When is the IPO going to happen?

Noonan has indicated the sale could take place in May or June. If that’s delayed, the next window is probably in the fall. Noonan has consistently said the determining factor will be maximizing value from the sale, and the state of the wider market will play a key role. The Bloomberg Europe Banks and Financial Services Index has risen 28 percent over the last six months. That rally has stalled in recent weeks, and privately, government officials insist they won’t be rushed into a sale.

What is AIB worth?

The agency that manages the government’s shareholding, the Irish Strategic Investment Fund, valued AIB at 11.3 billion euros in February. That was before the bank released its 2016 results, including a pretax profit of 1.7 billion euros and a reinstated dividend, and government officials view the February valuation as low.

How will the sale be priced?

A tiny sliver of AIB’s shares is still traded on the junior Dublin market. These are so thinly traded, they aren’t considered a particularly useful measure of the bank’s value. As ever, the price will be determined by demand, and early soundings indicate demand will be strong. AIB is viewed as a proxy for the Irish economy, which is growing at twice the pace of the euro-region. The bank is the biggest player in the Irish mortgage market, with about 35 percent of new lending. A valuation of about 12 billion euros would suggest a price of around 4.50 euros per share.

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Spanish Speakers

For Venezuelan exiles with money, Madrid has become a home away from home.

Venezuelans are increasingly turning to the Spanish capital as a place to invest as their home country falls further into economic chaos and the political mood turns more sour in U.S. havens such as Miami. The number of Venezuelans arriving in Spain rose more than 50 percent in 2015, according to the Spanish statistics office, the biggest increase after immigrants from the Ukraine.

With its shared language, stable politics and a property market that’s still recovering from a six-year crash, Spain holds many attractions for wealthy Venezuelans seeking a shield their assets from economic disorder in their home country. The number of properties sold to Venezuelan nationals jumped 17 percent in 2016 according to Spain’s property register.

“The worse things get in Venezuela, the more they buy in Madrid,” said Alvaro Gonzalez de la Hoz, director general at the real estate unit of Petrus Grupo Inmobiliario, which specializes in selling and renting high-end properties in the upscale Madrid neighborhood of Salamanca. “They feel safe here, they like the quality of life, they speak the language — and they’re taking money out of Venezuela.”

Hit by sky-rocketing inflation and a surge in crime, Venezuela has descended into an economic pit.

Worst Performer

While Venezuela’s central bank stopped publishing inflation data in December 2015, the International Monetary Fund argues the nation has entered a spiral of hyperinflation with price increases seen rising above 1,600 percent this year. Similarly, figures for domestic product haven’t been updated in more than a year, although the Washington-based institution estimates the Venezuelan economy contracted 10 percent last year, making it the world’s worst performer.

A political crisis which has seen President Nicolas Maduro holding on to power in defiance of mounting opposition is contributing to the economic collapse. Against that backdrop, food and energy shortages are common.

Meanwhile, Caracas-based Grupo Sambil has spent 60 million euros ($64.8 million) upgrading a shopping mall in Madrid they acquired in 2012 and plans further investments in Spain including in real estate, said Director General Alfredo Cohen in an interview. Venezuela’s late President Hugo Chavez expropriated a shopping mall in Caracas owned by the family in 2008, announcing the move on his weekly television show.

“The country is going through a political and economic crisis, so diversifying
our product, which has been very successful back home — in fact we are still
headquartered in Venezuela — is a good idea,” said Cohen. “We don’t just do shopping centers, we’re also a construction company and we have the cash to invest if we spot a good opportunity here in Madrid.”

For luxury real estate agents in Madrid, the crisis in Venezuela has yielded a business opportunity.

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Le Pen Writes Off Euro

The euro will tumble to a 15-year low if Marine Le Pen becomes French President, with the immediate reaction in the currency similar to that seen in the pound following the U.K.’s Brexit vote, according to economists.

The shared currency would drop to $1 or below a day after a victory for the National Front leader, according to 23 of 38 respondents in a Bloomberg survey, with five of those calling for a decline below 95 U.S. cents. A Le Pen victory is seen causing such a rapid decline because the anti-European Union candidate has threatened to call a referendum on the euro and re-denominate the nation’s debt.

A decline to parity for the first time since 2002 would be a fall of more than 7 percent from the current level of about $1.08, while a move below 95 cents would represent a decline of around 12 percent. Such a move would mirror the reaction seen in the pound following the U.K.’s decision to leave the EU, and reinforce an emerging trend of currencies taking the strain for political upheaval.

In a similar survey before the Brexit referendum last year, the majority of economists forecast a drop below $1.35 in the event of a decision to leave, a call that was borne out after the vote as the pound slumped more than 10 percent to a 31-year low of $1.3229.

“The market reaction would be very negative since re-denomination risks have been priced in only to a very modest extent,” said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva, who expects the euro to drop below parity after a Le Pen victory.

A Le Pen victory is seen as unlikely, with the economists surveyed assigning a 61 percent probability that independent candidate Emmanuel Macron will become the next president, compared with just 20 percent for Le Pen.

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Brexit And The Investor

Brexit will be formally triggered this week under Article 50 , paving the way for the 2 year process which will see the United Kingdom withdraw from the political and economic union of Europe.

Until negotiations are actually being hammered out and we can assess the likelihood of a hard Brexit, it’s hard to say. But there are some pointers to bear in mind.

On the one hand, the bull run continues unabated. The FTSE 100 index is in record territory, at well over 7,400 at time of writing. Clearly investors are hanging on in there in the absence of obvious alternatives or a decisive reason to pull out of the markets.

Undoubtedly, the big fall guy is sterling. The pound has been taking the hits in terms of reactions to Brexit developments and it’s likely to remain the tool markets will use when it comes to expressing a view on how the Brexit negotiations are going and what triggering Article 50 will ultimately mean.

‘Sterling’s slide from $1.49 to barely $1.22 since the EU referendum vote has acted as a shock absorber for the UK economy, potentially helping exports become more competitive,’ says Russ Mould of broker AJBell.

The question is how much uncertainty has already been priced into sterling’s value. The trouble is that it’s very difficult to know how far current currency levels do take account of the enormous Brexit question mark hanging over the country.

Many analysts expect the coming months to see further falls, with a low of $1.15 predicted, for instance, by Kamal Sharma at Bank of America Merrill Lynch. But others, such as Capital Economics, believe it could fall further, perhaps as low as $1.05, as the likelihood of Britain exiting the EU without a deal in place gains traction.

So, as a starting point, which asset classes are most likely to prosper?

Fixed income: Although the traditional response to uncertainty has been to de-risk by buying bonds, it makes little sense in the current environment.

Ten-year gilts are still yielding only 1.25%, even after the sell-off from low near 0.5% last summer. That amounts to an investment loss in real terms if inflation is set to remain above 2% for the medium term, as the BoE predicts.

Equities: Unlike most bonds, stocks have the potential for inflation-beating growth and also higher dividend income payouts. Moreover, although the Brexit uncertainties hardly make for a climate of prosperity, there remain many fundamentally attractive, well-run businesses. Some are now expensive, but others are pretty cheap.

For canny stockpickers, the current politically driven dynamics provide interesting opportunities. Long-term investors may be able to pick up good investments to buy and hold, while traders can exploit short-term market movements on bad news or political tension – of which there’s likely to be plenty more.

So, on the assumption that the main consequence of Article 50 being triggered that can be identified at this stage is that sterling will likely weaken further, what routes are worth exploring?

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd