In the foreign exchange market, important clients bellow their questions and shout their orders down an open phone line called a voice box. The banker’s the market maker, who’s obliged to make two-way prices, laying out where he’ll buy or sell his currency. The client must state the size of his order but does not have to do the deal; with big trades the client will usually simultaneously ask for quotes from several banks. Wording is concise and designed to avoid misunderstandings. The last thing the banker wants to hear once a large trade has been agreed are the words: 'how’re ya left?' – signalling the client has more of that currency to get rid of.
Reaching the end of Q3 2019, a difficult year with a deteriorating economic backdrop (which many believe is the worst since the great financial crisis of 2009), means there isn’t much time left to sort things out between now and Thanksgiving/Christmas/New Year. Sounds like a good time to look at quarterly charts and pencil in a few ideas where risks between now and year-end lie, and what might be in store for the first half of 2020. I’m not suggesting I have 20/20 vision, but it’ll hopefully give me a rough roadmap.
I’ll focus on four key British financial markets, starting with the FTSE 100 index. Year-to-date it’s up 10 per cent, not a bad show, but well behind China’s 27 per cent and several US and European major indices which managed to put on about 20 per cent; interestingly, very few are down over the last nine months. The trouble I have with FTSE 100 is that it first hit the psychological 7000 in Q4 1999 and at 7400 today it’s not materially different. A lot of hassle and stress for negligible gain. It’s formed a large, long-legged doji candle over the last three months, a warning sign of instability at current levels. Since Q2 2013 it’s formed a series of broadening patterns, like fractal megaphones, which also warn that the current price might be hard to sustain.
Obviously, the value of sterling is important for this index. The Bank of England’s sterling index has barely budged over the last five quarters, forming a series of long-legged dojis, suggesting these ultra-low levels mark the lower boundary since the exchange rate was floated. Against the US dollar it traded two standard deviations below its 40-year mean regression – and held. This hints that we should, if we haven’t already, find a low point that will be between $1.2000 and $1.1000 within the next six months; it’s too late to sell cable now.
Gilt yields are firmly on a downward trajectory, 30-year paper yielding a new record low under 1 per cent last month, and will ignore noises from the Bank of England. There is every chance that they too, like their eurozone counterparts, could turn negative.
Gold, often touted as a store of value, is back just under $1,500 with a spike high two standard deviations above the recent mean – not that far from where it was a decade ago. Meanwhile, median UK salaries increased by 15 per cent in 2008 to 2018 (from £24.6K to £28.8K), while house prices rose 43 per cent (from £160.9K to £229.8K). At the extreme, in Westminster wages fell by 1 per cent and property prices soared by 78 per cent.
