Market Talk- October 13th, 2017

Today we saw Bitcoin (BTC) close and break through the 5000-dollar mark for the first time –BTC recovered fast from the recent downturn to 2800 level found mid-September, the issue I have is what is the long-term prospects with such a cryptocurrency. The questions we must ask is will Governments allow such a currency without the control of the government or central bank to prosper? Currently the market cap of BTC is just shy of 100 billion dollars (a market cap larger than Goldman Sachs) and the whole crypto industry is around 200 billion dollars. Lagarde IMF’s head, came out and stated it is time to get serious about the cryptocurrencies, perhaps suggesting the SDR’s will transform into being a cryptocurrency in the future. However, the structure of BTC makes it difficult to see Governments adopting BTC in its current form, within the Banking sector to transfer money from A to B one would need to provide a list of documents such as KYC as to where the money came from and who you are sending it to. Why would BTC be any different? A soon as there is an excuse for Governments to come in, such as Tax evasion, Terrorism or more illegal trade – in my view BTC will be shut down (or deemed illegal) and replaced by a Government controlled cryptocurrency – which will lose its current appeal. Still a very profitable day for those involved, enjoy the ride as there will be much volatility going forward as new regulations and laws are being passed.
Europe, we will start with the UK Brexit talks. Today the UK Chancellor Philip Hammond branded Brussels “the enemy” during negotiations. This was so obviously coming, how on earth were the UK expected to get a good deal from this or any deal at all? It is in Brussels interest that the UK gets a bad deal to be made an example of, to stop the other member states following suit. I am not sure what to expect going forward, but it doesn’t look good for both sides. The GBP continued to move higher against the dollar but still fixed around the 1.33 region. 2/3rd of Politicians stated they prefer a no deal rather than a bad deal, meaning the UK will be free to determine low tax rates to attract businesses – Perhaps this would be a wise move for the UK. The labour party, do not want to take hold of the situation as they are afraid the blame of a bad break will be passed to them.
Elsewhere in Europe the Catalan president is under pressure from fellow separatist groups to declare independence now. It looks as if there will be little ways to negotiate with Madrid. Spain still considers the referendum to be illegal and unconstitutional and it doesn’t look if that will change any time soon. The Spanish leader Rajoy gave a deadline to declare whether an independence call has been made or not, if an independence call would be made there have been threats that Rajoy will trigger a constitutional article that could give them power to intervene directly into Catalan. To say there is democracy in Europe or anywhere in the world for that matter is laughable. Again, as we predicted we are seeing an increase in civil unrest throughout the globe and this is expected to rise further as the economy turns down. The Euro held ground today against the dollar, this was expected as there is so much resistance at this level of 1.18 – 1.19. We will need a big push for the market to continue to advance back to the 1.20 level and beyond. The European markets saw a slight improvement on the DAX and the SMI, other markets remained flat.
Just an observation from my travels, I have been very impressed with the infrastructure changes in Eastern Europe. Notably Poland, they have also recently emerged to be a leader in the region for IT services at a cost effective and are known to be good workers. Credit Suisse in Switzerland recently moved some of their back office to Poland and I noticed many large institutions doing the same. If there are any signs of growth in Europe – Poland and perhaps other Baltic countries such as Estonia and Latvia seem to be a place where growth can emerge. Estonian government have been very focused on bring Estonia to the new age by being the first country in the world to offer E-residencies. This allows individuals from all over the world to access and run a business within the European markets and it is starting to build traction. Still these nations only represent small populations, with the Baltic region only having 6.6 million inhabitants and Poland having a larger population of approximately 37 million. Poland was “buzzing” you could feel this in the air, however I have to say other countries in the region such as Lithuania (in places other than the capital Vilnius, Kaunas for example) you would be surprised to see on a Friday evening there was no activity in the town, not many people going for dinners or drinks at bars – shops were empty. It is quite a surreal atmosphere as there was infrastructure built but it felt like a ghost town – very friendly people though.
In Asia, Chinese trade numbers were released last night for our US and European readers. China stated a rise in imports in September of 18.7%, export numbers sang another tune as they came in at a rather disappointing 8.1% reason cited for this was the stronger Yuan and weaker demand from the Eurozone. Still the Shanghai composite, was up 13bps to 3390.52 a long way away from 2015 highs of 5166. Most of the major markets around the globe are making all-time highs or significant highs, but Shanghai Comp is not necessarily following that pattern, there will be a time coming when the Shanghai Comp will be more important than the Dow. We are starting to see companies such as Huawei taking market share from the likes of Apple and in some cases bringing out newer technologies to the market faster and at a more affordable rate with similar build quality. As China opens it market further we will see other companies doing the same and eating western market share – still at this time technical innovation is really driven through by the US and somewhat Europe.
The Nikkei was the real performer today, breaking out of its 21-year high and closing 200 points up to 21,155.18 – the JPYUSD also gained therefore capital today was flowing into the Japanese economy. North Korea tensions still are in the air, news emerging China is fed up with US pressure on North Korea as with the sanctions imposed trade is beginning to fall in the region with import figures between the two countries dropping 38% in September. Other Asian countries as well as Australia all performed well as it was a good day for the region as a whole.
A similar pattern could be seen in North America and South America today with all major markets performing well. The big announcement for the day was the CPI numbers, which showed a rise of 0.5% for the month of September. Analysts cited rising gasoline prices to be the cause during the hurricane season and if food and energy was stripped out of the number it would stand at a mere 0.1%. Never the less, it still looks likely for a fed rate hike come December. On this news the dollar dropped but rebounded during the course of the afternoon session. Before the close of the US session, Donald Trump vowed not to sign off on the current Nuclear deal with Iran, accusing Iran of sponsoring terrorism and said he would deny the regime any chance at acquiring nuclear weapons. Surprisingly May, Merkle and Macron were quick to issue statements backing the initial deal. This week we have already seen the US state plans to leave UNESCO by the end of 2018 over the treatment of Israel. International relations are heating up worldwide.
US Bonds took notice of the CPI numbers, with the curve flattening even more. The tail end, 5-30 year dropping 4bps. US 2’s 1.50% (-1), US 5’s 1.90% (-4), US 10’s 2.28% (-4) and US 30’s 2.81% (-4).
European bonds, German yields fell today across the curve still up to 10 years offering negative yields. You have 10-year yields on Spain (which could see 1/5 of their GDP evaporate as the Catalans leave) at 1.59%, Portugal at 2.31% or the UK gilts (during Brexit) at 1.37% whereas the US is offering yields at 2,28%, ask yourselves where will capital flow in the search for yield and security right now? Perhaps the market is not convinced of the USD strength going forward.
Commodities such as Gold, Silver and Oil were all bullish today as the CPI figures were released.