Brexit is here

We wake up this morning to the news that the Brexit side has won.  Quite a shock to the markets which in the last few days have been increasingly discounting the risk of such an event, most notably seen in the appreciation of the Pound and higher equitiy indices.  This morning Asian stock markets ared won 8% (Japan) and the Pound has tumbled significantly vs all currencies overnight.  GBPUSD down initially 10% now stabilising at the time of writing at -7%.

Whats next?

- Well Cameron will likely signal he will resign, but likely only after leads the government to transition to a post-EU world which may take 2 years.

- Markets will be highly volatile over coming 2-3 trading sessions as the implications and consequences are digested.

- Will central banks and notably the BoE be forced into action to stabilise the markets? If the GBP continues to fall they may even have to raise rates prematurely to defend the currency.  If trade and the economy weakens substantially, they may have to go the other way and move towards negative rates.  Most likely though is the implementation of fiscal measures such as liquidity support lines to banks and perhaps additional USD/GBP swap lines to the Fed to support the financial system and ensure ample liquidity.

- European equity markets will fall next week, perhaps up to 10% as uncertainty dawns on the political future of Europe and its economic consequences which are clearly negative in the short term (which is exactly what markets focus on)

- Politically there will be a wave of discussions around European nations and strengthened resolve among the anti-establishment and right wing parties to push for referendums to leave Europe.  Scandinavia and Holland are likely to try and follow UK's lead.   France and Le Pen will get further support for their agenda.  In the US,  Trump and his supporters will feel a sense of justification for their cause and brand of isolationist-protectionist politics.

Interesting times indeed!   Volatility is here and it is good for trading :)

Thoughts on Brexit and US Fed

Couple of comments on 2 key events this summer

1. Brexit vote 23/6 looks more likely judging by the sharp depreciation of the Pound in last 3 weeks, backed by polls showing gap is narrowing (to zero).  

I still believe the British people will do the right thing and vote to remain in the EU and hopefully reform it within using their clout.

If they do remain in, markets will rebound providing a good selling opportunity for longer term holds. Also I plan to sell GBPSEK above 12.10-12.20 if it rebounds from current 11.75 area levels.   Volatility is most clearly expressed in the currency which is going to see some dramatic swings in the next 4 weeks so be braced for anything.   Again,  expect the GBP to bounce back sharply the day after the vote for a couple of days when it is clear Remain camp has won


2.  Fed hike in June looking less likely on back of weak payroll & Brexit.  Expect hike on July 27th.

Why would Yellen risk raising rates before Brexit vote?  Second, any hike must be data dependent, and the most recent US payroll number on Friday for the month of May disappointed with only 38k jobs created vs 162k expected.   This may be seasonal, but certainly doesn't strengthen Yellen's resolve to hike.     Third, the Fed has made a point of preparing the market well in advance of a hike so it isnt a surprise -  they are doing this now and would not be a surprise now if it occurred in July 26-27 rather than June.   

One down, five to go...

Reports this morning that Greece reaches a breakthrough agreement with its creditors amounting to the disbursement of EUR 10.3 million.  The big news is that it appears IMF have made some major concessions here regarding debt relief ,  which I argue is an absolute necessity for Greece to ever recover.

Markets are up this morning as it eliminates a key summer risk.  Above all it shows a better negotiating climate on behalf of the Greeks and creditors, probably a sign that all parties are just too weary of a repat of last years malarkey which in the end didn't achieve much other than costly drama.

IMF board still needs to approve the deal but this is a formality.   Up next on the risk monitor is the Fed decision on June 15th and Brexit vote on June 23rd.

Expect an Eventful Summer

I've been keeping a low profile lately to observe the market development which mostly has been characterized by marginally positive to neutral sentiment. Equities somewhat higher,  oil has rebounded up to $50 supporting the energy sector / utilities and providing a degree of confidence to EM oil producers. Last but not least IG credit is stronger , supported by ECB's new corporate bond purchase program.  

My only transaction has been to buy some more Kinnevik B share now that they've dipped to 225kr and to average down my purchase price.  This holding to me is "off-benchmark" in that it is more in the future growth category than dividend income, but I believe long-term it will satisfy both objectives.

I believe the saying "sell in May and go away"  will apply to 2016 as well.  There are several reasons why i believe a 10-15% correction is coming in June-July.

1. Fed hike possible - June 15 Fed Chairwoman Yellen signaled on Wednesday it may actually hike in June and that two hikes remain on the table for 2016.  The market is clearly under pricing the probability of a June hike.  Market implied probabilities for a June hike  jumped from 5% to 30% post release of the minutes.  It should perhaps be higher yet...    A hike on balance should be equity valuation negative, particularly for div income stocks
2. Brexit Referendum - June 23.   Much already been said about this.   Polls say 40-45% chance of a brexit while Bloomberg's "superforecasters" suggest a much lower risk at 25%.  In any event,  a Brexit vote would have drastic and unpredictable consequences to the market as it introduces considerable uncertainty to Britain, Europe and indirectly the world.  With such a risk on the horizon,  why risk investing before this event? 
3. Greece/IMF. - Jun 7-Jul 20  Will there be a new standoff between the creditors and Greece this summer as a repeat of 2015? I think not, but it may still get messy with delays and broken promises which will spook markets. The added spice here is a disagreement between IMF and the EU led by Germany. The IMF wants to grant some debt relief now, while Germany wants to delay it until 2018 or later, effectively kicking the can down the road to appease German voters and southern European governments which have sold their people the virtues of austerity.  Greece is so indebted, the only solution to a bankrupt state is debt relief to give some chance of growth - moral hazard or not, the country is too far gone.  GDP of €176bn cannot carry a debt burden of €300bn (170%) even if the debt is spread out over 40 years. With zero or negative growth, there is no scenario in which Greece can "grow" its way out of the problem - and inflating away debt looks unlikely.  
   
   According to the WSJ, next key dates are  (WSJ Article on Greece Debt)
• Jun 7-  IMF- €300m  (2010 rescue)
• Jul 13- IMF - €449m (2010 rescue)
• Jul 20 - EU -  €3260m (two tranches)
  
  EU needs IMF in the program to maintain fiscal discipline.  Without agreement with the IMF, there will be now disbursement by the EU.  In total some €4bn due over summer. It could get messy.   
4. General over-valuation - Now.   Considering markets are already "toppish" with lower revenue and earnings, valuations look high and ought to come down.  Share buybacks cant continue for ever.  This is to say that on balance, risks are to the downside.  It would take some markedly good news about inflation or global growth to warrant higher indices.  There are of course bright spots, but overall equity indices are on the high side.
5. US election -  Republican Convention July 18-20 .  Elections are Nov 8,  which in itself could be a disaster if the Donald is elected, but there are market risks even in the near term.  If Trump is officially selected as the Republicans candidate at the convention on July 18-20.  What happens if Cruz (or someone else) is selected without popular support?

With so many "risky events" scheduled over the summer, I certainly plan to kick back on the sidelines with a cold beer and enjoy the footy Euro Championship, in waiting for a good entry.

Trump on Cruz control

The Unstoppable Donald.

So the moment we never thought would happen has arrived.  After winning Indiana, Trump is now the de facto Republican nominee after Cruz's withdrawal from the race last night.  It will be tough now for the Republican establishment to ignore Trump and declare it a contested convention but will see.   Kasich remains in the race as as an alternative although I don't see why, he is hopelessly behind The Donald.

Feelin' the Bern.

On the Democrat side,  Bernie Sanders won in Indiana defeating Hillary Clinton and making the race more event than supporters of Mrs Clinton want to make believe.   Put simply,  Bernie inspires and speaks truthfully to voters about change and injustice,  while Hillary fails to properly connect and excite voters. Yet she brings experience and is a seasons political operator who probably can bring about change effectively in her own way.  Whether that's what the electorate wants or not is another matter

Its going to be an exciting September.  

A Crude Awakening...

Encouraging to see oil price rise for the third consecutive week in April.   WTI now up $10/bbl to over $45 today from around $35 early April.   Also some $20 above the decade lows of $26.2 observed on 11 Feb 2016.   Its a politicized commodity so i have no idea what is driving price movement, in particular after the OPEC Doha talks failed on April 18.

In any event, I welcome the rise to more normal levels around  $50-60 which should reduce stresses in the global economy and hopefully (if not too late) reduce default rates in the credit HY market, which in the US and Norway is especially exposed to the energy sector.  Last but not least,  higher oil prices will again accelerate change towards renewable and more sustainable energy sources and relative dependence on unstable regions.

Good news for Fortum and other electricity producers...
And on a personal level,  it certainly helps the share price of one of my  div-yielding paying stocks - Finnish utility Fortum, which is majority owned my the Finnish State and has taken a real beating over last 12 months due to 1) declining wholesale electricity prices and 2) sale of Swedish and Finnish grids.

Will be interesting to see if oil can maintain some stability around these levels or in the $40-60 range.. that surely is a good outcome for all sides.

Pound showing signs that Brexit fears may be overdone..

Maybe President Obama did it?   Certainly feels like the Bremain campaign is gaining momentum with commercial, political, even Hollywood (Patrick Stewart sketch by the Guardian), weighing in on the side of reason.

Bloomberg's chart today shows a sharp fall in cable volatility to around -1,  dropping the most since May 2015.  You can see the good 11 day run since the 15th of April in chart below, with the British Bulldog currency gaining almost 3% over this period.

I believe we will see a continues slow upward appreciation, with cable above 1.50 and GBPSEK above 12.0 just before referendum unless a dramatic change in polls.

Oh and here is the sketch with Patrick Stewart (funny if you are a fan like me of Monty Python)  Patrick Stewart - What has the ECHR ever done for us?

"Friends don't let Friends drive drunk"

Obama weighs in on the Brexit debate in a 3 day UK visit clearly voicing an opinion that UK is stronger in the EU that outside.

BBC Video Interview on Brexit

It may yet backfire to have an outgoing US president to influence a UK referendum of this nature, but my hunch is it will help influence the 20% or so that are still undecided over to the Remain side.

Those firmly in favour of Brexit will only have had strengthened their resolve to leave by Obama's explicit comments.  

With around 2 months to go the vote and following Obama's visit, i lower my probability of a Brexit from 40-45% to 30-35%.  This should support the Pound in coming weeks,  and we have already seen some upward creep in Cable, but suspect this main movement has yet to occur following the vote.  

Risks are however asymmetrical, and  skewed to the downside if indeed we wake up to a positive Brexit vote on June 24th.

Central Bank Action Today - ECB and Riksbanken

9.30 CET today Swedish Riksbank will announce monetary policy.  A split committee will may vote in favour of continuing QE via bond purchases beyond the current 30/6 end date in a bid to weaken the SEK vs EUR and boost a moribund inflation rate.   The hawks will argue against further intervention in particular after Riksbankens strong move in February to cut rates further into negative territory by slashing 15 bps.

Later in day ECB is unlikely to move rates at this meeting, opting to save their powder for summer / post summer turbulence.  Instead Draghi will probably engage forward guidance (or as Mohammed el Erian calls it - "linguistic gymnastics") to keep the Euro weak which is not easy.

On a side note, continued dovish rhetoric from the ECB has knock-on effects on other smaller European but non-euro countries, clearly influencing the decision makings by their central banks such as the Riksbank in Sweden which is pressurized to act in kind to maintain relative weakness.

Interesting comment from Bob Janjuah today on currency wars:  Bob Janjuah Blog - Currency Wars

Where did the USD bull go?

On of the safest trades on the street was the long USD short anything else trade which had a decent and asymmetric reward to risk profile over the last two years (2014-2015).  That seems to have come to a crashing halt in 2016 as the dollar bulls have run inside for cover.  Chart below shows USD performance against EUR, GBP, SEK, JPY so far in 2016

While EUR and SEK have appreciated some 4% vs the greenback, the truly dramatic story is the pace of appreciation of the Japanese Yen.  Mr Kuroda and Mr Abe wont be too pleased about this and will only serve to ramp up currency war measures.   Japan desperately needs a weaker JPY to service their export oriented economy and import inflation to show that Abe's third arrow stimulus program is effective.   Japan needs to do something fast and I suspect there will be some major new central bank stimulus packages to weaken the JPY in in the next 6 months.  

  

Positive Q1 from Telia

TeliaSonera, or now better named Telia Company is an olden goldie in terms of dividend payers.  today it released Q1 results which came out better than expected, notably an EBITDA increase of 10.4% before one-off items,  and an increased EBITDA margin by 3.1 percentage points to 30.4%

Still topline continues to shrink,  declining 1.1% in SEK terms and is likely to continue to fall.   Future lies is fiber broadband and build out of services and capacity for coming 5G networks.

The ongoing investigations by the US (DoJ), Dutch and Swedish (FI) authorities regarding transactions in Eurasia (alleged improper payments in Uzbekistan) hang over the company like a cold damp cloth.   I hope they disclose more information around these investigations in the near future so the company can move on.   I suspect the DoJ penalty will be substantial.

Q1 report can be found here:  Q1 2016 Report

Kinnevik return of capital

Picked up a small batch of Kinnevik B shares this morning at the open at 250 kr on the news that they will propose an extraordinary cash distribution of SEK 18 per share in addition to common dividend of 7.75.  

Been discussing the merits of investment holding companies vs a funds with my brother and we both agree some are interesting propositions as often valued below NAV and provide focused yet diversified investment.  This is a minor side step from my usual fundamental dividend investing strategy, but I like Kinnevik as a growth story given their focus on long-term tech and online new ventures so a small position is acceptable. 

Positive market open

Feels like we are finally leaving this sideways trading and into marginally more bullish territory this week, mainly attributed to better than expected earnings so far.  Not that earnings have been great, many top-line earnings have been revised down over the past quarter but expectations have been too pessimistic relative to actual results.    Markets are also shaking off the sad OPEC meeting with both Brent and WTI abobe $40, and downward pressure on the greenback persists.

So far only a few of the US banks and blue chips have reported and we have the bulk ahead of us this week and next,  but already i believe we will get out of this Q1 reporting season better than already expected which will lead to a short lived rally (2-4 weeks).  

Overall this mini rally based on minor adjustments to quarterly results vs expectations doesn't  alter my conviction that we are in a multi year bear market based on anemic global growth and still excessive leverage since the GFC

I suspect we'll see the usual summer time volatility come June / July when Q1 is out of the way, and the markets turn their focus to Greece (which needs another tranche from the IMF's €86bn bailout programme in order to repay the ECB in July). Without the IMF, the EU/ECB will be much less supportive to Greece.   The other higher impact summer risk is the Brexit vote on June 23.  An exit is closer than many people think and even if bad for the UK (in my opinion),  it is equally bad for the EU and the euro-zone.  This uncertainty is difficult to predict how each outcome will play out and could cause a big upset this summer...

Utilities reverse some of gains from anticipated (but ultimately failed) OPEC deal today

Nordic utility Fortum bounces back and beyond Friday's close, despite initial 2.2% slump at the open following OPEC news

French utility EDF shows clearly price action around OPEC news, jump overight Thursday to Friday in anticipation of an OPEC deal and then reaction down this morning.  Side-ways price movement today,  still above thursdays close (before the event)

Whilst i have not tested it statistically for significance, the stock price movement suggests that there is some correlation between producers of wholesale electricity and global crude oil prices.  Whilst lower oil prices are bad for utilities, the overall market benefits (as it benefits industry and on some level consumer) and so we see a firmer tone in broader markets today

Interesting also to note the weaker USD trend so far in 2016 causing problems for the rest of the world, but mostly China (ill get back to this in a later post). If this trend continues, it should help commodity prices edge slightly higher over time

Oil takes a tumble after OPEC fails to reach agreement

Brent oil price falls 10% on OPEC agreement failure last night

Unsurprisingly OPEC failed to reach an agreement on output levels at their meeting of 16 opec members in Doha last night.   What is surprising is that the market had such high expectations of a deal and that over half of surveyed economists believed that an accord would be reached. Seems traders positioned accordingly and so we see a 10% reaction in oil price over night, from $44.75 to $40.15 a barrel before pulling back to $41.2 at the time of writing - still an 8% fall.

Will be interesting to see knock on effects on European utilities (down as correlated with electricity prices), oil and gas producers (down) and airlines (up) in today's equities trading.

Why am i not surprised about this OPEC talk failure?   Well its like asking the UN to agree on a meaningful and effective resolution.  There is no incentive.  Ignoring the fact that some countries hate each others guts and are fighting a proxy war (Iran-Saudi) you more importantly have diametrically opposed incentives  -  the rich Gulf states (Saudi, Kuwait, UAE) wanting to protect market share at all costs for the future,  while the poorer oil dependent states (Venezuela,  Iran) need to generate income at all costs in order to gain market share and increase USD state revenue.  Russia probably falls in between but would likely also want to see an output restriction and higher oil price at around $60 as their cost of production is higher than Gulf states and Iran.

OPEC is not an organisation representing similar interests and such it is set up to fail.  There will be no output reduction let alone freeze in the near term.  The least improbably outcome to hope for is that the Gulf states led by Saudi agree to a unilateral output freeze and cede market share to Iran for the common good.  But don't hold your breath.

Hello World!

And so it begins.  My first blog entry to my new blog "TheThirdWay" sees the light of day, perhaps appropriately expressed with with the classic programming greeting.   I hope to improve and refine the form of the blog over the coming days and weeks.  As for content,  it will be focused on current affairs, financial markets, economics and investment ideas, at least that is the grand master plan.

/ Heurlay