Monday, August 13, Gold and Silver. Macro Changes for Gold and Stocks.
It also suggested others were close to following suit: Shortly after inflation was revealed to have shot up to 2. However, there are significant obstacles to hiking. While growth is solid and inflation rising, we are not yet seeing the kind of upward pressure on wages that is needed to sustain gains in the underlying or core inflation rate. Aggregate demand is expected to slow and consumer spending is precarious.
The MPC knows monetary policy is a fairly blunt tool and is not enough to combat the real adjustment required for new trading arrangements. The point being that hiking rates to offset inflation carries a whole lot of other risks. Moreover, as inflation is less demand driven and the result of external factors Currency, commodity prices , raising interest rates risks plunging the economy into a recession.
However as we have seen the weather can change pretty rapidly. The trend is your friend? To a large extent this has been down to sterling weakness because so many components are big dollar earners.
Increasingly as we head into the performance of individual shares and the index as a whole should be dictated by the details of Brexit. Which sectors will be hit, which companies are exposed? The devil will be in the detail. Naturally, there are many competing factors.
Here we attempt to identify some of the most important. They touch on individual stocks BP, Shell which have an outsized effect on the index. We look at sectors and the prospects for earnings growth.
We look at sterling and the crucial effect that the fall in the pound has had on the market. And we look at the political landscape and how that might directly affect companies on the FTSE You might be fairly familiar with index weights or you may never have heard of them.
The point is to understand that in an index like the FTSE , the weighting plays a huge part. Notable in the FTSE is the prevalence of dollar earners. As we have seen since the referendum, the fall in the value of the pound has corresponded closely with the rise for the FTSE as the translation effect of converting dollar earnings into pounds for reporting is positive for balance sheets.
The weak pound makes UK shares cheaper for investors abroad. The leading FTSE companies are dominated by dollar earners. In addition to the five listed earlier, the other big players are the likes of AstraZeneca, GlaxoSmithKline and Diageo as well as the large number of miners and commodity giants. Something like three-quarters to four-fifths of all FTSE earnings are in dollars.
Long term traders may consider the trend of sterling when trading the UK But for intra-day and other short-term traders, what is the correlation like? Now we have to consider how the details of the Brexit negotiations will affect individual companies and sectors. Nevertheless, should there be another significant drop in the sterling exchange rate, we could expect to see a commensurate rise in the value of certain UK equities and the FTSE , led by its dollar earners.
The complication arises from what might drive another drop in the pound. If trade terms turn out to be significantly worse we would expect the value of a wide range of stocks, including some of those dollar earners, to be affected. Three of the most exposed sectors are retail, financial services and airlines. Brexit is just one factor affecting valuations, but potentially a vital one. Short term, the two things most relevant for the sector are pound weakness and consumer spending.
Neither have had much effect so far. Consumer spending has been resilient. Looking ahead, however, the cost of goods purchased from abroad will rise as hedging contracts expire and retailers have to pay more.
Retailers will either have to take the hit or pass it on the customers. More than likely it will be a bit of both, which will have a dampening effect on margins and profit growth. Meanwhile, the rise in inflation, which has accelerated markedly in recent months, is likely to crimp consumer spending. For example, the dependency on a relatively high number of non-UK workers who may or may not be allowed to remain in the UK.
Trade deals will also be important for sourcing goods at reasonable prices to sell to consumers. Even if there is a trade deal of sorts, we can expect retailers to source more domestically. Morrisons published a report urging greater reliance on UK-sourced food. This would entail a higher average price. Meanwhile, non-food retailers could enjoy a significant benefit from shoppers coming to Britain or shopping online to take advantage of the weak pound.
For large banks with a global footprint like HSBC or Standard Chartered, passporting rights are useful but not the end. They can simply move the operations they need to. Therefore the impact of Britain leaving either the single market or customs union may not be great on individual bank shares. Banks are pretty resilient in that sense. Another outcome of the Brexit negotiations to consider is euro-denominated clearing, which is dominated by London. The European Central Bank would dearly love to freeze the City out.
But the most important thing for banks is the relationship between earnings and the economy — things like the UK housing market, consumer spending and so on. If Brexit, either via the squeeze on living standards from the weak pound or a material drop in business activity, investment and earnings, or both leads to a fall in the UK economic outlook, we might just start to see the bullishness around UK bank shares fade. Finally, the relationship between the UK economy and interest rates is of material importance for banks.
Lower interest rates tend to reduce bank earnings. The longer the BoE keeps a lid on interest rates the tougher it will continue to be for banks to improve their earnings from interest. One thing is not in doubt — the impact of Brexit on the aviation industry is uncertain. Competing regulatory factors, the fall in sterling and the wider economic impact on demand for air travel make this a complex case.
And it comes amid a turbulent time for the sector as low-cost carriers disrupt the market, oil prices rise again and strikes by staff in Europe dent profits for the big firms.
The weaker pound has an effect on demand, making outbound travel more expensive and inbound travel cheaper. For airlines it also affects things like average seat prices eg Ryanair, which has large exposure to UK market but reports in euros , and fuel costs, as oil is priced in dollars. In terms of the details of the exit talks it is the regulatory environment that is most affected.
In theory, this could be a positive in some cases, giving the UK greater flexibility to negotiate agreements suited to the best interests of UK consumers. However, as a single country the UK would lack the bargaining power of a million population trading bloc such as the EU. In other words, UK-based carriers may be forced to take costly measures to remain part of these agreements. Meanwhile the cost of flying in and out of the UK from the EU and US could rise, should there be no corresponding deal for airlines.
More costly air travel could further dent outbound travel demand and hurt margins. The likely impact of any new trade deals with nations outside the EU is hard to quantify but is unlikely to produce a noticeable uplift in travel within the next two years given that no such agreements are possible while the UK is still a member of the EU.
Robert - Robert is a private trader with over 15 years experience trading the financial markets. Amman Financial Market AFM binaries beginner articles Binary Options Brokers binary options scames Binary Options Strategies bollinger bands cfd demo account cfd demo accounts cfd risks cfd tips charts city index combining strategies differences binary and vanilla options Dows Method Forex forex binaries fundamental analysis gdp how to trade binary options How to use Gann's Pyramid ig ig index ig markets indicator tools Interest Rates leverage long term cfd trading MACD margin margin requirements options theta penny stocks and cfds probability calculators recovering from losses slider spread betting spread betting brokers spread betting companies spreadex review spreads technical analysis The Relationship Between Stocks and Stock Options ticker trading analysis.
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