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Finance Magnates sat down with Ricardo Evangelista, a senior analyst at ActivTrades, to discuss some hot topics of the foreign exchange markets – Brexit, the United States vs. China trade war and whether there is a US stock market bubble.
The Brexit deadline is fast approaching, and many regulators such as ESMA and CySEC are warning financial institutions to be prepared for a so-called “hard Brexit.” In the lead up to March next year, how do you see the markets performing?
The potential issues that a hard Brexit scenario can raise, from the perspective of a regulator (in our case the UK’s FCA), will mainly revolve around the inability of the regulated firms to chase new business within the European Union after the 29th March 2019. A hard-Brexit scenario would entail the overnight introduction of barriers to trade in goods and services, without a transition period. Financial institutions currently based in the UK and operating across the EU are preparing for all eventualities, with many establishing subsidiary offices from where they will still be able to maintain operations across the EU.
It must be said that at this stage a no-deal scenario is still seen as less likely (around 25 percent chance according to the latest survey by Bloomberg) than one where some sort of agreement will be in place by the end of March 2019, allowing for an extended transition period.
Regarding the second part of your question; Brexit is only one of several stories currently under the spotlight. Yes, it is important, but we could look at the FED’s monetary policy tightening, political tensions in Italy, rising Oil prices and emerging markets weakness as arguably more impactful in the financial markets than Brexit. The main impact has been felt by Sterling; the Pound has been vulnerable to political tensions surrounding the negotiations, between the UK and EU, but also to clashes between rival factions within the British camp.
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If I hard Brexit is to occur, do you think we will see plunges in the pound as we did in June 2016?
Yes, I think that will be the case. After the June 2016 referendum, the Pound plunged, Cable touched 1.20 in October of that same year. The consensus is that, should a no-deal scenario materialize, the Pound will suffer considerably. I wouldn’t be at all surprised to see Cable touching 1.10. Conversely, should there be an outcome seen as favorable by the markets, Cable may reach 1.40 in the aftermath of the announcement.
Following the most recent escalation in tension between the US and China, how do you see the markets – particularly Asian currencies fairing in the near term?
The so-called trade wars have been an interesting focal point for many investors. The imposition of tariffs on Chinese imports by the US, the measured retaliation by the Chinese authorities and the escalating belligerence of statements (especially on the US side) have had an impact on the markets.
The US Dollar has been especially sensitive to the announcements and tone of rhetoric. Every time there is an escalation in tension the Dollar gains terrain. It could be argued that the Greenback is becoming the safe-haven of choice for many investors, a development justified by the divergence in monetary policies of the major central banks, with the FED adopting a more hawkish stance than the ECB or BoJ, to mention just a few.
This is bad news for emerging economies, particularly for those with high levels of debt denominated in USD and large current account deficits. A situation perfectly illustrated by what is happening in Argentina and Turkey, where inflation is rampant and interest rates rise as the currencies devalue (more than 50 percent so far this year for the Argentinian peso).
One of the problems with EM economies is that they tend to be seen as an asset class and therefore the risk of contagion is high. Take the Indian Rupee as an example, down 2.9 percent in the last month. A strong Dollar and rising Oil prices are not good news for Asian EM economies and their currencies; I think these troubles will linger on for a while, well into 2019.
Do you believe the US stock market highs are justifiable or is the market currently in a bubble?
Can we say bubble? I see a long-running bull market. US equities benefited from what some call the Goldilocks zone; Interest rates at historical lows for a prolonged period, running alongside the FED’s monetary stimulus policy, created extraordinary conditions to drive flows to the equities market, as the yields elsewhere were so low. These Goldilocks days may be coming to an end though, as a hawkish FED tightens up its monetary policy and ten year Treasury yields sit comfortably above 3 percent. It is likely that investors will soon cash-in on equity gains and look to fix income, for example, as a less risky but still rewarding alternative. This long-running bull market may start to fizzle out in the short to medium term.