Monthly Archives: August 2016

The Labour and G4S debacle is a stark reminder of both organisations’ troubles

Its leadership has been heavily criticised and its performance has been staggeringly dreadful in recent years. Am I talking about the Labour Party or G4S? It doesn’t matter. The description fits both the opposition party and the security firm.

This week’s latest saga, revolving around the Labour Party’s decision to terminate its contract with G4S over the security firm’s ties with Israel – followed by a last-minute U-turn – is a stark reminder of the troubles within both organisations.

This situation is the latest embarrassing gaffe for Labour, who may need to cancel its conference now – unsurprisingly no other security firms are lining up to take on the contract at such short notice.

Boycotting firms over their links with Israel is a tiresome story. How often do you hear organisations say that they are boycotting firms over their links to countries with a host of civil rights violations, such as China or Brunei? Or that they won’t work with the UK government because of its deals with Saudi Arabia? It’s hypocritical and borderline racist. Which, in my opinion, is a fairly accurate way to sum up the Labour party at the moment.

On to G4S. I’d practically forgotten that G4S is still in the country’s beauty parade of top outsourcing firms, in line to get the most lucrative jobs – both private and public sector. I’d say it’s pretty shocking that after a string of scandals (prisoner tagging, Olympics shambles etc) it was even in the running to keep such a high-profile contract as the Labour one. I think the problem lies with public sector outsourcing; a prolific array of barriers to entry for smaller firms (such as only getting paid every quarter, which is unviable for firms relying on monthly payment) mean that the tender process is uncompetitive and the contracts will go to the same tired old names (Serco anyone?).

I think this has a knock-on effect to private sector work, as the biggest firms, getting ever bigger from the plum public sector contracts, are in a stronger position, while the smaller firms aren’t getting the work they need to thrive and grow. I think government reform would help return the sector to some level of respectability.

US rates: Is Yellen set to spoil the party for commodities?

This week, Mike van Dulken from Accendo Markets looks into his crystal ball ahead of Janet Yellen’s speech on Friday…

All eyes (and ears) will be on her majesty the US Fed chair Janet Yellen this Friday, when she delivers what could be major market-moving speech at the Kansas City Fed Economic policy symposium in Jackson Hole, Wyoming. It is hoped that her talk will include hints (both clear and, of course, cryptic) about the path for US monetary policy. This is because the US Federal Reserve is the only major central bank fortunate enough to be in the position of being able to tighten policy post-crisis. And the reach and influence of the world’s reserve currency (the US Dollar) is far and wide as commodity traders well know.

Fed members have sounded hawkish of late, suggesting a rate hike might indeed be warranted sooner than markets are pricing in, but the US dollar remains well off its summer highs. In fact, it’s not far from its summer lows with a rising trend of support going back four months. We believe this provides Yellen with the breathing space she needs to take a rather hawkish tone, without it resulting in so much US dollar strength that it actually prevents her and her committee from voting for another hike in September.

We still see September as highly unlikely. Even December to us is off the cards when you take into account political event risk on both sides of the Atlantic (Trump stateside; Spain and Italy in Europe). Yes, there are US data points suggesting a US rate hike could be due, but surely not while other central banks are doing the polar opposite. The European Central Bank is widely expected to add to stimulus on 8 September while the Bank of England updates us on 15 Sept and the Bank of Japan could move again towards the end of next month.

Don’t forget that every step the latter group takes to ease policy further, which serves to weaken their own currencies, has the offsetting effect of strengthening the US dollar. A US rate hike, or a strong hint of one being imminent, therefore represents a risk for Yellen. It will potentially send the US dollar much higher than the Fed might be comfortable with, thus becoming a hindrance for exporters. Even if it gives consumers more bang for their buck in terms of imports.

The Fed has been at pains to hammer home a message of a ‘slow and gradual’ pace of future hikes, aiming to keep the US dollar index from returning to flirt with the 100 mark it traded around at the beginning of December and end of January. Would it risk sending it back there? Yellen is still having to tread the fine line between countering market complacency about low rates forever while simultaneously prepping traders for another eventual US hike. Not an easy job.

Economic barometer copper is already back testing July lows. We wonder whether a hawkish tone this Friday could serve to deliver a real dent to the commodity space, with a negative knock-on for the FTSE’s mining contingent. We already see the red-metal and others (aluminium, oil) putting raw material-focused names on the back foot this morning as a result of last night’s US dollar rebound. Could these trends become rather unwelcome friends?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

The Bank of England’s QE hurdle shows the economy needs more than stimulus

This week, Augustin Eden from Accendo Markets tells Hot Commodity why the Bank of England’s QE troubles show the UK economy needs more than stimulus to boost consumer confidence…

Some awkward moments for the Bank of England over the last couple of days have again hit confidence in the ability of central banks to sort out economies when things turn sour. The UK’s central bank was unable to buy all the gilts (UK government bonds) it wanted when pension funds decided they didn’t want to sell – and why would they? Pension funds are the most risk averse of investors, required to have a virtually guaranteed stream of income to use to pay peoples’ pensions as and when the time comes.

Interest rates on government debt are now being driven towards zero – some shorter dated gilt yields have even dipped negative in the last two days. What will the pension funds do with the cash anyway? They’ll probably try to buy more bonds or even invest in defensive equities, but equities are riskier. Trying to encourage pension funds to take more risk is a dangerous move and, importantly, is something you can’t cloak in the smoke and mirrors of technical jargon. Listen to a central bank press conference and there’s little to be gleaned by those who aren’t versed in economics or market speak, but anyone can work out what it means for pension funds to take more risks – it means their pensions are at risk.

Likewise, everyone can understand what it means when pension funds can’t find the guaranteed income they need. Again, pensions are at risk. A healthy economy does of course depend on business confidence – if there’s plenty of cash in the system and it’s cheap to borrow, then you may as well spend and invest. But business confidence depends on consumer confidence, and I would argue that the latter is more immediate.

This throws up a major issue. If people are worried about their pensions – the one thing they should be able to rely on – then they’re not confident. If quantitative easing and other economic stimulus measures are not increasing consumer confidence then we have a problem. When you look at somewhere like Japan whose government and central bank have been engaged in stimulus activities for years and whose economy is still merely limping along, it could soon be time to start thinking about simply putting money directly into people’s pockets.

This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.