Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,
The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.
So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.
That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.
As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.
Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.
Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.
After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.
The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.
However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.
I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.
Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.
Markets are frothy – stay safe, and trade safe.
*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will
The Pound against the U.S. Dollar broke 1.38, a critical psychological support/resistance level that gives bulls confidence to attack the 1.40 level.
The recent tailwind in the Pound has mainly come from the number of initial doses the U.K. has distributed amongst its citizens. More than 10 million people in the U.K. have received at least one dose of the Coronavirus vaccine, prioritizing the elderly and frontline workers.
However, initial optimism will not last long. Further pushes higher in the pair will long-lasting positive effects from the vaccinations and the lockdowns, with a Reuters poll finding that many analysts believe it'll take more than two years for Britain's economy to recover to its pre-Coronavirus levels.
James Smith at ING stated that "While we expect strict lockdowns to trigger a 3% fall in U.K. GDP in the first quarter, the more optimistic outlook for vaccinations means a sustained recovery could start in the spring". Furthermore, Mimi Rushton, co-head of global F.X. sales at Barclays, stated that "The reative outperformance of the U.K. in rolling out the vaccination program has definitely helped buoy expectations for an accelerated recovery."
Analysts will be looking at GDP figures coming out later this Friday, with analysts predicting a 0.5% in GDP Growth.
However, the strength of the pair also comes from the recent weakness of the U.S. Dollar. As risk-on takes over in many asset markets, the continuation of the Federal Reserves' $120 Billion scheme and inflation concerns continue, long term tailwinds continue to pressure the U.S. Dollar. However, many analysts are reconsidering their predictions of a weaker dollar on the possibility of a better than expected U.S. recovery and the Fed backpedaling on their extraordinary measures.
George Saravelos, head of currency research at Deutsche Bank in London, stated that "Having been vocal dollar bears last year we argue it is time for a consolidation in the dollar lower trend and would take profit on [negative dollar bets against the euro]."
The Pound against the US Dollar is currently one of the most exciting pairs to be keeping an eye on, as it is essentially fighting between a rock and a hard place. Currently ranging just under 1.30, both nations have events coming up that will significantly shift the currency pair in either direction.
In the UK, we have Brexit negotiations affecting the Pound side of the equation. After the 30th of September passed, the UK is trying to buy time due to the worsening of the Coronavirus in Britain. There is pressure mounting onto Prime Minister Boris Johnson to ensure a deal goes through to avoid a compounding economic and human loss that a no-deal Brexit and terrible Coronavirus conditions bring to the UK.
According to a CNN Business analysis based on Citi and the Institute for Fiscal Studies forecasts, a no-deal Brexit could cost the UK economy $25 billion next year. Laurence Boone, Chief Economist at the Organization for Economic Cooperation and Development, stated that "The Combination of Covid-19 and the exit from the EU single market makes the UK outlook exceptionally uncertain" and that "actions taken to address the pandemic and decisions made on future trading relationships will have a lasting impact on the United Kingdom's economic trajectory for years to come."
The election is heating up with current polls across the Ditch, showing Biden taking a double-digit lead over Trump, with Joe Biden polling at 54%, and Trump polling at 43%. Biden seems to have the advantage over Black, Latinos, Whites with a college degree, and young voters. Conversely, Trump's strongest group continues to be White Evangelical Christians, rural voters, and whites without college degrees.
However, for both, the Coronavirus continues to run rampant. Unfortunately, investors and traders assume that America has given up on the Coronavirus and is learning to live with the virus. They can't get a second wave since they have not finished their first yet. Therefore, a second partial lockdown in the UK in response to the second wave has weighed on the Pound stronger than the US's long first wave.
As for the pair, a Biden Victoria plus positive Brexit talks should push the Pound higher, and the US dollar strengthens, moving past that strong 1.30 mark. However, a Trump win and further deterioration of Brexit talks should see the Pound weaken, and the US dollar strengthens.
The pound against the US Dollar has returned 11.4% since its March lows. As well all know, a lot has happened since March. But what has not come to fruition is the Brexit talks. As the transition deadline for the UK to leave the EU approaches, Brexit talks have suddenly come back into the spotlight. However, Prime Minister Boris Johnson has thrown a wrench in the Brexit negotiations, threatening to break international law by passing local legislation to override certain parts of the Brexit deal.
The pound has been extremely volatile to these negotiations and developments with the Coronavirus. Yesterday, the Bank of England held interest rates at 0.1%, alongside stating that they explored how negative rates might be implemented. The pound dropped 0.6% against the US dollar, touching 1.28663. Petr Krapta, currency strategist at ING, stated that “they were exploring how negative bank rates could be implemented effectively, should the outlook for inflation and output warrant it at some point.
JP Morgan analysts weren’t too excited by the BoE’s announcement, stating that “there was little to be gained from taking action today” and that “should it need to react at a later date, the Bank will benefit from a little extra firepower left at its disposal having not wasted it today”
Brexit – or what doesn’t happen with Brexit. Currently, the EU has given the government until the end of the month to scrap the law they had proposed, or face legal action. Furthermore, they have till December to exit the EU properly as their transition period ends. These two factors have pushed the price of betting against the pound has skyrocketed. Therefore, being bullish on the pound has become cheap. Positive sentiment regarding a softer Brexit and progress on negotiations should push the pound higher.
Second factor: Of course, the Coronavirus. If the pandemic levels off, and economic damage is not as bad as it seems, the BoE may not implement negative rates and may push the pound higher.
Currently, the markets have not priced in the effect of negative rates. However, that may change as we get closer to crucial Brexit deadlines.
The pound is down 2% against the U.S dollar in the past couple of days, on growing prospects that the United Kingdom will leave the European Union without a trade agreement.
Brexit talks are set to continue this week, with UK's Prime Minister Boris Johnson playing hardball with European Officials. He has imposed a October 15 deadline, to which he plans to quit Brexit talks if no deal is reached.
The pounds have mostly forgotten Brexit, with the Coronavirus pandemic guiding everyone's attention away from the non-completion of Brexit.
Seema Shah, Portfolio manager at Principal Global Investors, stated that headlines over the weekend were a "timely reminder that, while the markets have been distracted by the UK's struggle to rejuvenate the economy, Brexit negotiations have quietly been going nowhere."
The main issues include competition, fisheries, and solving disputes.
Further downwards pressure came from the revelation of the UK government planning to release legislation that would override critical parts of the withdrawal agreement – notably the deal that would undermine the agreement that Boris Johnson signed last year to avoid a return to a hard border.
The pound has been rallying since its March lows, up 14.13%. However, it has underperformed compared to its peers. For example, the Australian dollar has rallied 31% since its March lows.
The main issue for the pound comes from its appreciation, not discounting Brexit talks. As headlines start to creep up about Brexit near Boris' October 15 date, the pound's volatility will increase. Petr Krapta, a currency strategist at ING bank, stated that "the Brexit head is back on and sterling is, in our view, unprepared." This comes at a time when the UK's grip on the Coronavirus continues to slip, with daily cases spiking, recording the highest number of daily Coronavirus cases since May.
GBP/USD broke 1.30 today, a critical resistance that signals a strong bullish sentiment on the Pound as the dollar weakened on the Fed, sending full message support. Jerome Powell stated that they would keep all support lines open, including bond-buying, low-interest rates, and central bank dollar swaps. Jerome Powell emphasized, “[the fed] is not thinking about thinking about thinking about raising rates.” Andrew Slimmon, Senior Portfolio Manager at Morgan Stanley, stated that the “Fed would keep supporting risk assets.”, suggesting that it would be an excellent time to be long in risk assets.
The rally in the pound comes when the UK still has a 7-day average Coronavirus case figure of around 737, with cases continuing to rise. This number is 26% more since 16th July. On Thursday, there were 846 new Coronavirus cases, the highest since 28th June. This conveys the UK is not fully controlled the Coronavirus.
Boris also faces the issue of Brexit, with a transition deadline expiring on 31st December. The pandemic has made this difficult, dragging the Brexit negotiations on for five years now. The pounds’ strength amidst all the UK’s facing problems shows the strong sentiment of the dollar weakening.
The Euro also rallied against the USD on the weakening of the dollar. Like the Pound, it broke a strong key technical resistance of 1.18. However, like the UK, the continent is experiencing spikes in Coronavirus cases in Spain and Germany. Spain received the largest rise in daily cases since June, booking over 1,200 infections. Similarly, in Germany, sees 902 new Coronavirus cases, up from 684 just a day ago.
The rally in the Euro comes on the back of many tailwinds, such as 750 Billion Euro package and relatively successful handling of the Coronavirus across Europe.
Anish Lal did some excellent technical analysis on the GBP/USD. You can watch it here.