Q1 Close; Markets Breath Sigh of Relief
March 31, 2016
We've just been watching a great interview on Bloomberg with an HSBC currency strategist. The subject was Brexit and what happens if we go. The long and short of it is that the bookies are pricing in a 30% chance of a Brexit and the FX market has the Pound undervalued versus its interest rate fair value by about 8%. Therefore, if the risk goes up to 50%, the currency falls a further 5%. If we leave altogether, the Pound falls by 15-20% from where we are today.
They say that won't happen overnight (though there will be huge moves on the 24th June if we do go) but that it will take a few weeks and the two years of deciding what kind of relationship we have with Europe will maintain the uncertainty and leave Sterling out in the cold. On the flip side, we stay in and the market should fairly quickly recover towards fair value. So 20% to the downside and 8% to the upside on Sterling. If we see an article that relates to this interview, we'll post it.
Back to our scheduled ramble…
The Markets held up as we came into the closing stages of the month, the quarter and, for many, the financial year. Currencies were a busy space throughout yesterday's sessions as investors' squared positions following a turbulent few months. Equities across Europe were all up around 1.5%, as they played catch up on the rally that Janet Yellen provoked with her 'cautious approach to rate rises' speech.
Equity markets overall could do with a little push higher today to get back onto the level that they started the year, though the exception to that is China, which is 15%+ lower than where it went it 2016. A Chinese central bank official said this morning that growth may slow to 5% after 2020, but will average 6.5% between now and then, which investors took a bit of confidence from.
Gold is the star performer of this quarter, having had its largest rally in 25 years. The precious metal is traditionally a hedge against inflation, but in a world with no inflation it has done incredibly well as central banks cut deeper into negative interest rate territory. Even though it's risen 15% this quarter, its still around $700 off the peak seen in 2011 when Greece was falling apart.
Oil has also staged a massive recovery this quarter, from its lows of $26 to highs of $41, but the rollercoaster seems far from over. Yesterday prices fell after US inventory data showed that stockpiles are still high in the US, which shows oversupply risk. Investor forecasts for the next quarter vary quite a bit, as you'd expect, but there do seem to be more thinking that oil is now overvalued and that a hefty price correction is to come.
We think we're in for an interesting few days ahead. Given the turbulent start to this quarter and now that we're back to broadly where we started, or higher, in a lot of markets, will investors treat their Q2 strategy as a continuation of the end of Q1, or do they change tact and say that we're now at levels where being short makes more sense? We've no idea which way the herd will move, but we don't think anyone will be sitting on their hands and waiting it out.
Mark Carney is just this minute speaking and saying that 'monetary policy alone won't fix a low growth environment and persistent low growth can undo financial resilience'. Sounds like he's borrowed Mario Draghi's hymn sheet, but makes a lot of sense. Mark Carney probably gets a bit more credibility from it though, as at least he's not dishing out the ultra-loose policy at the same time as saying those words….
Have a great day.