A quick­sand econ­omy and fi­nan­cial as­sets

Financial Mirror (Cyprus) - - FRONT PAGE -

The pre­car­i­ous na­ture of global fi­nan­cial mar­kets re­mains a source of con­cern to in­vestors. Brexit fears may have abated to a de­gree, but they re­main ever present in the shad­ows. If we ex­am­ine the re­cent per­for­mance of the FTSE 100 in­dex and the GBP/USD cur­rency pair, it is ev­i­dent that mar­ket volatil­ity abounds. Over the ten trad­ing days from July 4 to 15, the FTSE 100 in­dex en­dured five days of losses and five days of gains. Over­all, Bri­tain’s premier in­dex has im­proved markedly from ap­prox­i­mately 6,000 on June 23 to its cur­rent level of 6,669.24.

The one-year change for the FTSE 100 in­dex is -1.25%, which is a re­mark­able achieve­ment given the bat­ter­ing that the UK fi­nan­cial mar­kets, and its cur­rency have taken. Over the past month, we have seen sub­stan­tial im­prove­ments in the per­for­mance of the FTSE 100 in­dex. Be­tween June 20 and 27, the in­dex ap­pre­ci­ated by 1.95% or 117.60 points. Be­tween June 27 and July 4, it ap­pre­ci­ated by 7.15% or 439.14 points, and be­tween July 4 and 11 it ap­pre­ci­ated by 0.19% or 12.81 points over­all. From July 11, the UK premier in­dex has gained 1.19% or 78.60 points. The 52-week trad­ing range for the FTSE 100 in­dex is 5,499.51 on the low end (Fe­bru­ary 11) and 6,813.41 on the high end (July 20, 2015). That the FTSE 100 in­dex is a sliver off the 52-week high is re­mark­able given cur­rent re­al­i­ties.

The per­for­mance of the FTSE 100 in­dex and the ster­ling is one of the most in­ter­est­ing re­la­tion­ships on a macroe­co­nomic level. When the GBP weak­ens rel­a­tive to other cur­ren­cies, the ex­port po­ten­tial of listed UK com­pa­nies im­proves. This nat­u­rally bodes well for the FTSE 100. This is pre­cisely the rea­son we have seen such a strong resur­gence in Bri­tain’s premier in­dex since the June 23 Brexit ref­er­en­dum. How­ever, in re­cent days we have seen the GBP/USD cur­rency pair bounc­ing off its 31-year low to­wards its cur­rent trad­ing level at around 1.32. This makes UKpro­duced goods more ex­pen­sive on the global stage and has re­sulted in a slight re­treat in the FTSE 100.

How­ever, the volatil­ity that we saw over the course of July was par­tic­u­larly neg­a­tive for the FTSE 250. This in­dex is cur­rently trad­ing at 16,727.27, down 0.36% or 60.77 points. Over the past five days it gained 2.38% as the GBP sta­bilised against the green­back. For the year-to-date, the FTSE 250 has shed 2.78%, not dis­sim­i­lar to the FTSE 100. This in­dex has a 52-week trad­ing range of 14,967.90 on the low end and 17,781.40 on the high end. The dif­fer­ence be­tween the FTSE 250 and the FTSE 100 is re­lated to where the prof­its of these listed com­pa­nies are gen­er­ated. 75% of prof­its in the FTSE 100 are for­eign-based, while the FTSE 250 is a Bri­tish-based

in­dex of listed com­pa­nies.

Turn­ing our at­ten­tion to the GBP, there has been a strong resur­gence in the trad­ing range. Re­call that the GBP/USD cur­rency pair hit a 31-year low of 1.28 in early July brought upon by ex­treme mar­ket volatil­ity vis-a-vis the Brexit. The GBP/USD cur­rency pair – the ca­ble – is one of the most heav­ily watched cur­ren­cies of the sum­mer. It has con­sis­tently been de­clin­ing in 2016, hav­ing shed 9.37% for the year-to-date af­ter open­ing at 1.4738 on Jan­uary 1. The pair has made con­sid­er­able gains in the past five days with an ap­pre­ci­a­tion of 1.80%.

On July 11, the cur­rency pair was trad­ing at 1.2947, and it is now at 1.3184. This pair will re­main ex­tremely volatile in the com­ing weeks as Prime Min­is­ter Theresa May be­gins to spell out her plans, if any, for Bri­tain and its ex­tri­ca­tion from the Euro­pean Union.

There is no doubt that the Brexit de­ba­cle has thrown the UK econ­omy for a loop. How­ever, the econ­omy was slow­ing even be­fore the Brexit is­sue took cen­tre stage. This was ev­i­dent in the slow­down in growth, es­pe­cially in man­u­fac­tur­ing and con­struc­tion. The ser­vices in­dus­try re­mains strong. When it comes to the Brexit-in­flu­ence on the UK econ­omy, we will not have much hard data un­til the end of July, Au­gust and Septem­ber. Pre­lim­i­nary eco­nomic re­sults will slowly be­come avail­able and they will be re­vised to re­flect new re­al­i­ties in the United King­dom. None­the­less, the Q1 2016 gross do­mes­tic prod­uct growth (quar­ter on quar­ter) is 0.4% with the econ­omy hav­ing changed by 2.1% on an an­nu­alised ba­sis.

Dur­ing Q1 2016, the per­for­mance of the econ­omy can best be de­scribed as sub­dued. We will know how it has per­formed for Q2 within the next two weeks. How­ever, any Brexit-re­lated im­pact will not be felt un­til much later in the year. The UK has been strug­gling to re­turn to its pre-2008/9 re­ces­sion level, and it only man­aged to do so by the end of 2015. In terms of Q3 pre­dic­tions, GDP growth is largely ex­pected to de­cline to 0.28% from 0.56% (quar­ter on quar­ter). This is largely due to trade data from May and pur­chas­ing man­agers in­dex data for June. There is no doubt that the shock out­come of the Brexit ref­er­en­dum on June 23 will neg­a­tively im­pact the quar­terly growth rate.

The IMF had an­tic­i­pated the U.K. econ­omy to grow at a ro­bust rate in the pres­ence of a ‘re­main’ vote. How­ever, that has been com­pletely up­ended and now the IMF has re­versed its po­si­tion. In fact, IMF chief, Chris­tine La­garde ex­pressed se­ri­ous con­cerns about the per­for­mance of the UK now that it has voted to leave the Euro­pean Union. We are see­ing all man­ners of neg­a­tive ef­fects im­pact­ing the UK econ­omy with de­mand for gov­ern­ment bonds reach­ing multi-year highs and yields drop­ping to multi-year lows. The GBP/USD cur­rency pair has plunged to a 31-year low, and is only now slowly start­ing to re­cover. The un­em­ploy­ment rate is 5%, with the em­ploy­ment rate at 74.2% and weekly earn­ings growth over the three months to April in­creas­ing by 2.3%.

None­the­less, all of this static data will mean pre­cious lit­tle now that fi­nan­cial mar­kets have adopted a risk-on ap­proach to the GBP and many multi­na­tional con­glom­er­ates are look­ing to shore up their in­vest­ments by pos­si­bly re­lo­cat­ing from the UK to the EU or else­where. We have seen mar­kets see-saw­ing from a risk-off ap­proach to eq­ui­ties to a risk-on ap­proach to eq­ui­ties as the bal­ance con­tin­u­ally shifts. Strong jobs data in the US re­sulted in traders go­ing all-in on Wall Street, and the FTSE 100 in­dex has ral­lied on the back of a weak GBP.

Through­out, we have ris­ing in 2016 and this re­mains high. seen the will likely gold price con­tinue con­tin­u­ally as volatil­ity

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