• Matthew Fotheringham

🌎 Bumbling BoJo | No end in sight for the US | Pass my tablet, I need a vacation | 3 Things

Updated: May 22, 2020

May 15th, 2020

Happy Friday!

As COVID-19 has taken its grip on the world, investors have taken a step back as they look to take stock of changing market conditions. We are delighted to announce that our CEO Ashley Groves, will be joining a panel of experts for an upcoming webinar discussing the changing landscape of cross-border M&A on May 21st.


Did You Know...

The largest M&A transaction in history was in 1999, when Vodafone Group decided to by German telecom giant Mannesmann, for a whopping $180.96 billion.

Can you name the other four M&A’s that make up the top five biggest transactions?

(Answers below)

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BoJo's Bodge Job

The whole of the UK had their knotted hankies on their heads and one foot out of the door in the hopes that Boris and the government were ready to lift the lockdown… and to be honest, even now no Brit really knows whether they are still on lockdown or not. We decided to help by trying to make sense of his 14-minute diatribe.

Boris: “We have a plan, it’s a conditional plan”

Translation: “We couldn’t agree on a plan but needed to say that we had one”

Boris: “The R can’t go back above 1”

Translation: “The reproduction rate of the disease cannot go up”

Boris: “It’s thanks to your sacrifice we are now in a position to begin to move in steps to level 3”.

Translation: “We are still at level 4”

Boris: “You can even play sports, but only with members of your own household”

Translation: “The premier league isn’t coming back anytime soon” or “if you live on your own get a dog”

Boris: “So work from home if you can, but you should go to work if you can’t work from home.”

Translation: “Annoying kids doesn’t mean you get to go to the office”

Full Speech can be found here.

The official proposed timeline of the lockdown lift is as follows:

May 13th - People allowed to take unlimited exercise but fines will be enforced if they do it negligently.

June 1st - Shops to carefully reopen and primary school pupils to head back to school

July 1st - Hospitality and public spaces can start to gradually reopen.

One thing is clear, the vast difficulty and variability of dealing with an invisible enemy like this mean that there is no quick fix, and patience will likely be the most productive remedy.

UK GDP beat their dismal expectations and the rest of the world’s but that’s not saying much. GBP has been steadily declining after it’s recent gains. With one of the highest volatilities of the major pairs at almost 9%/annum, this translates to an annual VaR of 15%. That’s high enough to impact almost any investment return and requires managing. Fortunately, hedging costs are almost nil, less than 0.2%/annum (thanks to Central Banks everywhere). Unemployment and PMI are the key data releases next week.


Powell Says "Long Road To Recovery"

Trump dubbed FED Chairman Jerome Powell as the Most Improved Player. You can see why, Powell came out with a message stark in contrast to what we’ve been accustomed to. It was a far more realistic and pragmatic speech from a man who doesn’t seem to be concerned with re-election.

In what seemed a very deliberate speech, Mr Powell was clear to state that the economic recovery would come at a slower pace than previously expected and would not begin until the virus was brought under control. He went on to assure viewers that even though we are seeing a severe decline in economic activity and employment, the FED has the means to weather the economic storm the country is facing.

The comments come on the back of the call for more stimulus above and beyond the $3TN already printed. Mnuchin recently said that he wanted to “see how the 3 trillion is working,” and suggested that we would need to “take a step back for a few weeks” to see how the helicopter cash impacts the economy.

It is no secret that the US is facing a dire situation, with job gains from the last decade having all but been erased. Additionally, among those working in February, 40% of people in households earning less than $40k have lost a job in March. Unemployment itself hit 36 million. Mr. Powell said that in terms of reducing unemployment, there is an expectation it will peak in a month or so, but although it is anticipated from here unemployment will decline - it’s going to be a longer road than some V-shapers have been mooting.

With increasing unemployment and stammering economies, there is little doubt that we will be seeing the effects of the pandemic for a long time to come. The stock markets initially dropped on Powell’s rather grim comments but all major indexes finished up on the day.

Another 2.9 million jobless claims this week. This and even a rather gloomy Powell did little to dampen the markets. The dollar index is back above the 100 level, having moved steadily upwards since the beginning of 2018. That’s still well below its 1986 high of 118 (and 115 in 2002). Retail sales fell 16.4% from the month before and the USD is down slightly today across the board. Next week’s jobless rate is the only data release of note.

US Dollar Index


We're All Going On A Virtual Holiday

Unlike the rest of the world, the EU is unable to provide a direct stimulus that seems to be needed to revive its economy. Although the economic bloc of 27 countries did back a short term $540 billion plan to support businesses and economies. This is quite frankly a drop in the ocean and meant that European countries are looking for alternative options to reduce the impact on their economies, one such way being to kick start their tourism industry. The EU has 10% of it’s overall GDP tied into tourism and that accounts for 50% of the world’s international arrivals.

Germany and Austria seem set to be first to ease their border controls this weekend, but we are still unsure as to how airlines and hotels will cope with the issues caused by social distancing “rules”. Maybe we should all just go on a virtual summer holiday, at least we won’t lose any luggage. 300m+ people are going to concerts on Fortnite now and as we get closer to a more super realistic virtual experience. I’m sure a Mediterranean metaverse is not far away.

So, how bad is the economic damage you ask? Well... France, Italy and Spain have all registered first-quarter contractions of around 5%, the German and Dutch fairing a little better shrinking only 2.2% and 1.7% respectively. Although, two consecutive declines in GDP has meant Germany has officially entered a recession.

However, in typical European Union fashion, when the European Commission floated larger stimulus funding ideas, the push back has been around how the burden should be shared between member states.

Nevertheless, since then, Germany has passed a $1.3 trillion package, with Italy following with a $55 billion package adding to $25 billion packages that were deemed insufficient.

Volatility is at nearly 7% - not as bad as GBPUSD but again worth looking at managing. Hedging costs are less than 1%/year. We’ve seen a high of 1.1460 and a low of 1.06 in 2020 alone. GDP came in at -3.2% which was slightly better than expected to bring the EUR off of its day lows of 1.08. Next week we will be watching out for the ZEW survey and PMI along with any more news around the stimulus situation there.

In Other News

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Hedging Long-Tenor FX Risk and Cross Currency Interest Rate Swaps

Most CFOs and Financial managers are familiar with the use of FX forward contracts to manage risk. It's clear that forward contracts are excellent vehicles for managing shorter tenors; if longer tenors are required (e.g. to hedge a multi-year foreign investment) they can be problematic... READ MORE

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Quiz of the week

  • $165 billion - American Online (AOL) merged with Time Warner Inc

  • $130 billion - Verizon Communications Inc acquired Verizon wireless from Vodafone

  • $130 billion - Dow Chemical merged with DuPont

  • $104 billion - Anheuser-Busch InBev acquired SABMiller

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