Warren Buffett: Investing VS Speculating

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.

But a pin lies in wait for every bubble.

And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street – a community in which quality control is not prized – will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.

The Week Ahead: Dollar Mixed Awaiting Fed Meeting

The US dollar managed to end the week on a positive note despite North Korea’s missile launch,  a lower than expected retail sales reading on Friday and flat US inflation data on Thursday. Economic data has begun to reflect the impact of Hurricane Harvey and later in the month, the effects of storm Irma will be taken into account. The pound was one of the few currencies that gained against the dollar after the Bank of England (BoE) left rates unchanged on Thursday, but said rate hike could come sooner than expected boosting the currency against the USD. Central banks will remain in the spotlight with the Fed and the Bank of Japan set to publish their September monetary policies in the week of September 18-22.
Probabilities of US Rate Hike in September and December
The US Federal Reserve will publish its rate statement on Wednesday, September 20 at 2:00 pm EDT. The US central bank will also release its updated economic projections and will host a press conference at 2:30 pm with Fed Chair Janet Yellen. Last month the Fed added that “relatively soon” it would start shrinking its massive balance sheet accumulated during its QE program. On the topic of a change to the benchmark, Fed funds rate the CME FedWatch tool rates the probability of a September rate hike at 0 percent, with December a 50 percent chance.
Inflation in Japan remains low despite BoJ Stimulus
The Bank of Japan (BOJ) will publish its monetary policy statement on Wednesday, September 20 at 11:50 pm EDT with a press conference to follow on Thursday, September 21 at 2:30 am EDT. The Japanese central is not expected to make a change to its monetary policy as inflation remains stubbornly low despite unprecedented stimulus by the BOJ. Growth has continued its upward trend but with little help from inflationary pressures, no reduction in stimulus is on the horizon.
Tax reform talk helps Dollar
The EUR/USD lost 0.812 percent in the last five trading days. The single currency is trading at 1.1932 after US tax reform got closer to reality this week. The euro had advanced at the start of the week as more USD weakness was anticipated, but a turnaround in market expectations on a December rate hike and a show of momentum on tax reforms started a dollar rally putting the pair below 1.20. Political uncertainty has been a big factor of USD trading and a Trump administration ready to embrace dialogue with Democrats is seen as a productive development.

Next up will be the September Federal Open Market Committee (FOMC) meeting. The market is expecting the Fed to formally announce the start of the reduction of its balance sheet. Since the move is expected to be gradual the Fed could push the announcement back, especially if there is some uncertainty about a December rate hike but the dollar would suffer if that were the case. The White House has remained tight-lipped about who will be the Fed Chair next year. Yellen’s term ends in February, and with the falling out to favor of Gary Cohn, she could even remain in the job. While Janet Yellen was not the first choice of the Obama administration she got the nod after a scandal took the front-runner Larry Summers out of contention.
Higher interest rates for BoE?
The GBP/USD gained 2.867 percent during the week. The currency pair is trading at 1.3567 near weekly highs of 1.3617. The hawkish policy by the Bank of England (BoE) drove the pound to its highest post Brexit referendum. Even the doves within the central bank have endorsed a rate hike in the near future. Rising inflation and a tighter job market have convinced uber dove Gertjan Vlieghe to back a higher interest rate.

The Office for National Statistics will release UK retail sales on Wednesday, September 20 at 4:30 am EDT. The forecast calls for a rise of 1.1 percent, but taking the volatile items out of the equation will show a 0.1 percent gain. Rising inflation in the UK is a concern because despite a tighter job market wages remain flat putting more pressure on households to cope with higher prices.
Oil Prices Surge
US oil prices surged 4.016 percent in the last five days. The West Texas Intermediate is trading at $49.63 after briefly touching $50 per barrel. Oil prices recorded near two-month highs as demand expectations picked up after the Organization of the Petroleum Exporting Countries (OPEC) released higher demand in 2018. US refineries getting back online also boosted energy prices. Higher demand with limited production due to Hurricanes Harvey and Irma boosted prices.

The International Energy Agency (IEA) also published a report this week that forecasts strong demand keeping the price of Brent above $55 and WTI near $50.

Macron Holds Final Rally, Pledges Fairer Society

The Latest on France’s presidential election

French centrist candidate Emmanuel Macron has held his last campaign rally before Sunday’s presidential runoff in southwestern France, calling on voters from the left and the right to choose his reformist, pro-European platform.

Macron promised to “give strength back to the country” and “build a more efficient and fair society,” addressing the crowd from an open-air stage in the central plaza of the town of Albi.

One day after his crucial televised debate with far-right Marine Le Pen, Macron said that showed his rival’s plan “doesn’t go anywhere” and “has no proposal for our country.”

He encouraged voters who chose Socialist Benoit Hamon, far-left Jean-Luc Melenchon or conservative Francois Fillon in the first round to make in the second round “the choice of hope, of future” and to reject Le Pen’s “authoritarian, anti-European, nationalist project.”

Global Stocks Mixed Ahead Of French Vote

European stocks declined while most Asian markets rose Friday ahead of the first round of voting in France’s closely watched presidential election.

KEEPING SCORE: In early trading, France’s CAC-40 retreated 0.6 percent to 5,043.53 and London’s FTSE-100 shed just under 0.1 percent to 7,124.36. Germany’s DAX was little-changed at 12,023.01. On Wall Street, the future for the Standard & Poor’s 500 index was up 0.1 percent while that for the Dow Jones industrial average was unchanged.

FRENCH ELECTIONS: French voters will choose among 11 candidates Sunday in the first round of a presidential election that has the country and financial markets on edge, especially after a shooting on Paris’ Champs-Elysees boulevard that killed a police officer and wounded three other people. The Islamic State group claimed responsibility for the attack. Candidates include populists Marine Le Pen and Jean-Luc Melenchon, who both say they want to tear up agreements that bind together the 28 European Union nations. Citigroup said a victory by either could drive a 5 to 10 percent selloff of European equities. Other contenders seen as more supportive of EU membership include Francois Fillon, a conservative former prime minister, and Emmanuel Macron, a former banker and economy minister.

ANALYST’S TAKE: “With the French elections bearing down on markets the bulls seem to be wrestling back some control here and despite the prospect of real volatility on Monday, there is hope that all will be well,” said Chris Weston of IG in a report. “Having pared back expectations around the issue to a minimum, some have even bought into the idea that perhaps U.S. tax reform could be on the cards.”

U.S. TAXES: Treasury Secretary Steven Mnuchin, speaking at an IMF event, said the Trump administration’s plan for tax changes will come “very soon.” Mnuchin’s goal of getting it passed by Congress’s August recess has slipped. He said the administration still hoped to get a measure through Congress well before the end of the year. Mnuchin is also working on proposals to overhaul regulations put in place by the Dodd-Frank Act passed after the 2008 financial crisis. He said he would have a report with recommendations for the president by June that would address major issues in changing the law.

ASIA’S DAY: Tokyo’s Nikkei 225 gained just over 1 percent to 18,620.75 and Seoul’s Kospi added 0.7 percent to 2,165.04. The Shanghai Composite Index was little-changed at 3,173.15 and Sydney’s S&P-ASX 200 rose 0.6 percent to 5,854.10. Hong Kong’s Hang Seng shed 0.1 percent to 24,042.02 and India’s Sensex retreated 0.3 percent to 29,315.79. Benchmarks in New Zealand, Taiwan and Southeast Asia also rose.

ENERGY: Benchmark U.S. crude shed 7 cents to $50.64 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 14 cents on Thursday to close at $50.71. Brent crude, used to price international oils, fell 2 cents to $52.97. It rose 6 cents the previous session to $52.99.

CURRENCY: The dollar declined to 109.09 yen from Thursday’s 109.32 yen. The euro fell to $1.0701 from $1.0717.

USD Weaker on Geopolitics Ahead of US Inflation and Retail Sales

The US dollar is weaker across the board since Wednesday’s afternoon comments by US President Trump on the currency being “too strong” that prompted a selloff of the currency. Geopolitical risk has risen after the US confirmed the use of a huge non-nuclear bomb in Afghanistan. Risk aversion reversed some of the dollar loses as investors got ready for a long weekend in most major markets and expected lower liquidity on Friday and Monday.

The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) and the core CPI (removing the volatile energy and food components) on Friday, April 14 at 8:30 am EST (12:30 pm GMT). The forecast calls for the core data a 0.2 percent gain and for the full CPI to remain flat. At the same time the US Census Bureau will release the retail sales data. Core retail sales is expected to gain 0.2 percent while adding auto sales will result in a gain of 0.1 percent for the total value of retail sales in the US.

The US consumer continues to be confident about the economy as today’s Consumer sentiment shows by hitting a three month high but there has been little spending to go with that increase in confidence. The preliminary report from the University of Michigan also noted a gap between democrats and republicans in regard to their different levels of optimism. Economic indicators back up a stronger US economy but political risk at home and abroad have taken their toll on the dollar which could get a boost form strong sales and inflation data and vice versa could keep on the back foot if low inflation and weak spending get the Fed to reconsider their rate hike path.

Pound Lower As UK and EU Divorce Begins

The Prime Minister of the United Kingdom, Theresa May, will invoke article 50 of the Lisbon treaty on Wednesday, March 29 at 7:00 am EDT (11:00 GMT) by telling the British parliament that she has submitted the signed letter to the European Union. This symbolic exchange will trigger a two-year process that will result in the UK withdrawal from the EU. The PM will face questions from the Commons at that time with a statement expected at 7:30 am EDT (11:30 am GMT). Within 48 hours the EU will circulate a draft of negotiating guidelines to be discussed in late April.

The Brexit referendum on June 23, 2016 kicked off a tidal wave of political instability as British citizens voted to break a long-standing economic and social pact. Opinion polls badly missed the mark, leaving markets in high state of volatility as investors reacted to the shocking result. The pound has depreciated more than 15 percent since the vote as the Bank of England and other institutions have warned of the risks of ending the relationship without a fall back option.

The market has already priced in the first wave of Brexit after the referendum but the length of the process and the different stances (hard vs. soft exit) and the particular timing (French and German elections this year) complicates the valuation of the true impact to the UK economy of the decision to leave the Union. Investors need to follow the developments out the London and the reaction in Europe as this two-year divorce gets under way.

Triggering Brexit Tomorrow

Tomorrow is likely to go down in history. Prime Minister Theresa May will trigger Article 50 and officially begin the Brexit process.

Here’s everything you need to know.

What is Article 50?

Article 50 refers to the 264-word clause of the Treaty on European Union (often referred to by the marginally more memorable moniker, the Lisbon Treaty) allowing countries to leave the European Union (EU).

Any country can leave the union subject to “its own constitutional requirements”.

What will happen tomorrow?

The cabinet is expected to meet tomorrow morning rather than their usual Tuesday meeting to allow for May’s top ministers to discuss the Article 50 notification.

Then it is expected the Prime Minister will face her standard Wednesday grilling in the House of Commons from midday, with May expected to make a statement following Prime Minister’s Questions.

Meanwhile, the notification will take place around the same time.

So how will we notify?

There is no stipulation in the article for the form of the notification, but presumably a cheeky text message would not meet the standard for statecraft required.

Instead, the UK’s ambassador to the EU, Sir Tim Barrow, will hand-deliver the notification letter to the European Council and its president, Donald Tusk. The letter will be signed by the Prime Minister.

What will be in the letter?

We don’t know yet, but we will have our first chance to see the historic document later in the afternoon.

How long will negotiations last?

From the notification date the UK will have two years to negotiate the terms of exit.

The negotiations will follow the path set down by another article in a connected Treaty. The next bit of obscure constitutional jargon we will all need is Article 218(3) of the Treaty on the Functioning of the European Union.

This one is less important though: it just says the European Council must authorise the opening of negotiations and appoint a negotiator.

When will the UK officially leave the EU?

If this process is followed correctly the UK will have left the EU officially by the start of April 2019.

Whether this happens in practice might be rather more complicated. The vast body of EU law and regulations (not to mention the institutions which do the regulating) will probably take a significant amount of time to duplicate or remove.

Transitional deals around the UK’s leaving process have been called for in some quarters of the business community, although so far we have no detail on what the government’s priorities will be.