Henyep Capital Markets Analyst Giles Coghlan expects very little volatility in UK FX and stock markets

Expecting low volatility, Giles Coghlan says “I do not expect sharp movements across currency markets and the FTSE following the Chancellor’s speech as much of this bad news is already priced in” as we take a look at the market movement likelihood in the UK

The year 2020 will most certainly be recognized in the annuls of history for generations as a year in which those appointed to government positions in order to represent us, the people, turned their responsibilities around in a very quick globally aligned action which now puts the public as their servants, rather than the governments as democratic representatives of public requirement.

Thus, now in many Western nations, especially those with substantial financial markets influence such as Britain, America and Australia, and some Asia Pacific region nations such as Singapore and Hong Kong, freedom and democracy are becoming a distant memory, and the government-enforced lockdowns decimating livelihoods.

Whilst this has waged untold damage on social and economic structures that have taken hundreds of years to build and placed unprecedented powers in the hands of national leaders, the single upside to the tyranny is that markets have become volatile, and as a result, electronic trading is alive and well.

Low volatility has been a bugbear for quite some years, even to the point at which almost ten years ago, FXCM founder Drew Niv said that there had been a period of almost zero volatility for 21 years – meaning that if that can be taken at face value, we have seen very stable markets with little volatility for almost 30 years, with the exception of one or two completely disruptive episodes such as the Swiss National Bank’s removing of the peg on the EURCHF pair five years ago.

At that time, so unprepared was the entire industry for any form of volatility, that this cost brokers and Tier 1 banks dearly as negative balances piled up and in some cases finished off brokers. The b-book once again was triumphant.

However, if the FX industry has become so accustomed to stable markets and not much volatility due to the political stability and democratic, free, business orientated structure of most ‘first world’ countries whose currencies make up the reserve currency pairs that are most traded, and in which the majority of trade execution takes place under well organized infrastructure, what happens when those regions become despotic and people are forced behind their sofa, losing their business, livelihoods, freedoms and decimating the economy?

Volatility, that’s what.

Given that the retail electronic trading sector has become so accustomed to low volatility to the point at which it views it as necessary in order to remain in business – counterparty credit is extremely hard to obtain from Tier 1 FX interbank dealers partly due to absolute risk aversion – and yet revenue margins are very low due to over 1200 near identical MetaTrader based entities on the market offering the same range of spot FX instruments, many of which are just white labels of MetaQuotes, an affiliate marketing firm rather than a platform company, and the resultant cost of attracting low-deposit, inexperienced, low lifetime value clients.

It is common knowledge within marketing departments of most retail FX brokers that it costs over $1200 to acquire a client via the somewhat obsolete method of lead buying and affiliate marketing, yet many first time deposits are as low as $200, with lifetime value at around six months.

So, given the new wave of volatility, it would perhaps present an opportunity should brokers look to structure their business around it and attract traders that are up for the challenge of trading volatile markets rather than novices stagnating in a b-book zero sum situation, as long as risk management and the right framework of execution methodologies could be utilized.

There is always a pragmatic view, however, and despite the stock markets having rallied recently because of the marketing related bluster and tabloid sensationalism around several ‘vaccine’ boasts by major pharmaceutical companies, which has been a boon for news traders as the now illiberal governments of Western Europe and America may seek to force these untried drugs onto a hapless public, potentially boosting the profits of these firms beyond the horizon, it is worth considering that further announcements by Dickensian politicians may not create even higher levels of volatility.

Henyep Capital Markets (HYCM) Chief Currency Analyst Giles Coghlan takes a cautious view when considering the forthcoming Spending Review in the United Kingdom, home to the largest capital markets center in the world, and the highest valued major currency.

The Spending Review is due to be delivered by Britain’s incompetent Chancellor of the Exchequer Rishi Sunak, whose blue suit conceals a red ideology.

Mr Coghlan said “Compromises, cuts and caution: that’s the order of the day. The UK has a budget deficit of over 18% and public debt is now over 100%. COVID-19 has only put more pressure on the treasury’ coffers, and there are serious questions over how public debt will be managed. This spending review will only be a one-year spending plan instead of the typical 2-to-4-year outline due to uncertainty surrounding Brexit and COVID-19.”

“Naturally, this Conservative government does not want to be responsible for more austerity measures, though one cannot see how public debt can be addressed without cuts to spending and tax hikes. However, the general mood of fiscal conservatism is deeply unpopular and against the mood of the moment which is to spend our way clear of the present crisis” said Mr Coghlan. (Its a Conservative government in name only! – Ed).

“Investors and traders are well aware of the conundrum facing Rishi Sunak. With defence spending and green energy investment already announced by the Prime Minister, I expect the Chancellor to take the middle ground – moderate spending cuts and minimal tax reform” continued Mr Coghlan.

“Importantly, the financial markets will be most interested in Sunak’s economic forecasts for the UK. It’s won’t be rosy. Public net borrowing is at £322 billion, or 16% of GDP, which is the highest peacetime level in at least 300 years. For 2020-21, public borrowing could be in excess of £350 billion” he said.

“Despite this weak scenario, I do not expect sharp movements across currency markets and the FTSE following the Chancellor’s speech as much of this bad news is already priced in. The more immediate concern is the path of Brexit negotiations with the GBP having rallied in expectation of an imminent deal, perhaps as soon as this week.” said Mr Coghlan.

Jamie Johnson, CEO of FJP Investment added “With spending cuts and tax reforms on the horizon, investors will be retreating to assets that are secure, resilient and have the potential for long-term capital growth. This partly explains why the property market is alive with activity.

“We are seeing many people eager to take advantage of the stamp duty holiday by investing in bricks and mortar. As a result, house prices have been rising at an impressive rate – a reflection of an asset high in demand and limited in supply. I expect this to remain the case well into 2021.

“Importantly, infrastructure spending remains a core policy commitment, with billions pledged for upgrades and the construction of new-build homes. The government knows that any attempt to bring about the UK’s post-pandemic recovery needs to include measures that promote investment into property and infrastructure. As well as being a key election pledge that Boris Johnson will be keen to honor, putting public funds into such developments will also promote economic growth and productivity” concluded Jamie Johnson.

Read this next

Institutional FX

Fiserv secures major payment institution licence in Singapore

Brookfield-based financial services technology provider Fiserv Inc has obtained nod for a Major Payment Institution license in Singapore.

Institutional FX

Finalto expands NDFs line-up with Taiwanese dollar

Finalto announced today that it has expanded its non-deliverable forwards (NDFs) offering with the addition of Taiwan’s dollar to its trading platform.

Opinion

It’s time for FX to Harness Crypto’s Potential

Jonathan Cumberlidge, FX Sales Director for BVNK, makes the case for cryptocurrencies in improving the efficiency and flexibility of foreign exchange trading.

Digital Assets

Owner of OptionMint, OptionKing, and OptionQueen gets 30 months in prison

A US federal judge has sentenced Ohio resident Jared Davis, who was found guilty for his participation in a multi-million fraud scheme carried out by Israeli-run binary options websites.

Executive Moves

iS Prime co-founders Raj Sitlani and Jonathan Brewer leave, but “business as usual”

“For our clients and teams at iS Prime, iS Risk and iS Prime Hong Kong, it is business as usual. We will be increasing our investment in our technology and staff, putting our clients first as we drive the business forwards to maintain our market leadership position.”

Digital Assets

Germany-focused DekaBank taps METACO for digital asset custody offering

“Digital assets are a critical part of the future, a radical new way for how assets will be represented, from currencies to real estate.”

Technology

Eventus launches AML solution for TradFi and digital asset space

“Firms operating in traditional financial markets and digital assets alike are facing greater challenges than ever to protect themselves from those presenting a risk to their businesses and reputations, along with their standing with government regulators.”

Industry News

Qomply launches direct-to-FCA trade report solution that bypasses ARM

“Certainly, for back-reporting large volumes of data, QomplyDirect removes extra ARM fees by offering the flexibility of sending reports directly to the FCA via a firm’s own infrastructure.”

Executive Moves

BNP Paribas AM appoints Geoff Dailey as Deputy Head of US Equities

“Geoff has more than 20 years’ experience in the industry and as a key, senior member of the team with a strong investment pedigree and leadership profile, he is the natural successor for Pam.”

<