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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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Trying (and largely failing) to avoid Brexit ..... Is the Dollar topping out ? ref :- "Morgan Stanley Says Dollar Bull Run Has Ended, Time to Sell" , Bloomberg Markets

November 16, 2018

 

Well you can't, can you ? Avoid Brexit, that is ..... but for now we'll just say this : £/$ is trading just above $1.2800 as we speak, having been as low as $1.2738. The FTSE 100 is marginally lower (about 0.3%). Frankly, we're a little surprised that the reaction to yesterday's events and how they may develop hasn't been even more extreme for sterling assets. When it comes to sterling assets, particularly at a time such as this, we need to remember two things .... first, with its heavy weighting of companies with largely dollar-based revenues, sterling weakness is generally good news for the FTSE 100 so yesterday's reversal and today's move lower, marginal though it is, is probably a bigger indication of anxiety than is immediately apparent. And when it comes to UK Government bonds (and other top-grade issues), a flight-to-quality and the likely economic damage wrought by such a crisis points to lower yields and higher prices.

 

You can only shake your head, really ...... the UK's Conservative Party has been periodically tearing itself apart over Europe for decades, but now looks as though it's going to do the job properly at last. Without any inside knowledge whatsoever, the impression is that PM Theresa May's days may be numbered and her Brexit deal will fail to get the required support. One suspects that Mrs May's position is the result of a desire to make the most of a bad and possibly impossible job. The forces lined up against her right across the UK's political spectrum may be driven by high-minded principle, or by plain old cynical opportunism. But whatever the motivation those forces look too strong. The chances of a second referendum  --  which would stir up chaotic political debate almost bound to get very dangerously overheated  --  are growing .... as are those of a general election in the not-too-distant ....

 

That would mean that there is a pretty good chance that before too long the UK could be governed by a hard-left Labour party in which radicals now pull most of the strings and which boasts a number of "former" Communists in key positions, not least that of Chancellor. Whatever one's own political hue, it's not hard to guess what the markets would make of that ......

 

Anyway, just quickly the Dollar .....

 

Morgan Stanley have joined some other heavyweights in suggesting that the US unit's heady run may be coming to an end. The Dollar Index, the trade-weighted measure of the dollar's value, has risen by about 8% over the last seven months, and for good reason ..... amongst a range of factors, the greenback is a refuge at a time when the escalating trade dispute is engendering some severe market anxiety, and the US' powerful (and pretty unique) economic performance has provoked rises in US Treasury yields and short-term interest rates.

 

Morgan Stanley's Hans Redeker suggests that the capital inflows into the dollar that are a result of those factors have largely gone into easily-exited money market funds rather than long-term investment, and as such they could be quickly reversed if and when sentiment changes. Fair enough, but why might that sentiment be on the point of changing ?

 

The new Democratic control of the House of Representatives will hamstring the current administration, undermining the dollar .....the effects of Mr Trump's massive fiscal stimulus package will wear off ...... lower oil prices will only add to DISinflationary pressures. "The USD may weaken as credit spreads widen ***, equity prices fall and sovereign bond yields also begin falling ...." says Morgan Stanley.

 

*** Credit spreads are the difference in yields between two bonds of roughly the same maturity but of different quality, typically between US Treasuries and corporate debt. If the spread widens, it suggests increased concern over the corporate's servicing of its debt.

 

Whether you agree with it or not, it's a perfectly reasonable view ..... but if you are going to short the dollar, it's possible that it may not be sensible to do it against British Pound right now. 

 

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