Can Liz Truss be another 'Iron Lady" of Britain?

According to Reuters, New British Prime Minister, Liz Truss faces a financial markets test. If she was planning big energy subsidies only, investors might not worry too much. But she plans tax cuts – and may pick a fight with the Bank of England (BoE) and trigger a trade war with the European Union (EU).

In many ways, Britain faces similar challenges to other European countries i.e. high inflation, rising interest rates, soaring energy prices and an imminent recession. Insofar as it stays in the pack, markets won’t single it out for special attention.

Britain faces extra risks. Inflation is particularly high, Brexit has damaged the economy and the country has a chronic current account deficit meaning it relies on foreign investors to pay its bills. Truss does not want to be part of any pack. She believes that bold supply-side reforms will launch the country onto a new higher-growth trajectory.

While that is not a bad ambition, she hasn’t presented a convincing strategy to deliver it. Rather, she looks like a populist prime minister who relishes confrontation.

According to media reports she is set to declare China a threat and has questioned Britain’s special relationship with the United States. She is also taking a hard line with the EU. She also wants to change the BoE’s mandate, which is to deliver price stability.

Up to now, Britain has been in the middle of the European herd on fiscal policy. Government debt was 100% of GDP at the end of the first quarter, not vastly above the EU’s 88%. Since last September Britain had allocated 1.6% of annual economic output to cushion consumers and businesses from the energy crisis, about the same as Germany and France, according to Bruegel, the Brussels-based think tank.

It’s still unclear what extra help Truss will give to support people with spiralling energy bills this winter. But it will be expensive. Just supporting households could top 50 billion pounds over the next year, or about 2% of GDP.

Helping businesses would require another mega-package. If gas prices stay high now that Russia has suspended some gas deliveries to Europe indefinitely, the government could face similar costs the following winter and beyond.

This bailout may end up being roughly in line with the rest of Europe. Germany announced a 65 billion euro energy package over the weekend.

The difference is that Truss will at the same time cut taxes on employment and reverse a planned rise in corporation tax, costing at least 30 billion pounds a year. And she does not seem to want to cut spending to compensate.

Truss is also dead set against funding her support package via windfall taxes on energy companies. This is a missed opportunity since the sector is set for excess profits of up to 170 billion pounds over the next two years, according to the Finance Ministry calculation.

High inflation might help the government by lowering the debt-to-GDP ratio. But this is not as much of a get-out-of-jail-free card as it is for some other countries, because a quarter of British government debt is linked to rising prices and just over a third has been bought by the BoE.

One area where Britain is already an outlier is that prices are rising faster than in other Group of Seven countries. Inflation jumped to 10.1% in July, and Citigroup analysts recently predicted it could reach 18.6% early next year.

As a result, the BoE will need to jack up interest rates sharply to re-establish price stability. It’s also minded to start selling government bonds later this month. These moves are unlikely to please Truss. Not only will they deepen the recession and hit her core voters; these will make it harder to fund a fiscal bonanza.

This could lead to further confrontation between Truss and the BoE. Although many investors agree that the central bank has been slow to nip inflation in the bud, the priority now is to bring prices under control. Financial markets will not appreciate anything that looks like tampering with the BoE’s independence.

Until recently investors viewed Britain part of the European pack. Both pound and the euro have fallen sharply against the US dollar this year – and government bond yields have been rising across the world. But there are now the first signs of jitters focused specifically on Britain. The yield spread between UK and German 10-year government bonds has widened by 0.3 percentage points in the past month. In the past 10 days, pond has fallen about 2% against the euro.

Year 2020 has changed our lives for ever

It has truly been a year like no other, with the pandemic dominating not just every news cycle but each of our lives. From work to family life, where we went, and what we did, nothing was untouched by COVID-19. But as people got used to phrases like “self-isolate” and “social distancing”, there were plenty of other news too. 

Coronavirus

The year began with a new virus originating from Wuhan, China. Wei Guixian, a 57-year-old shrimp seller, is thought to have been the first person infected. “Every winter I always suffer from the flu,” she later told Chinese media. “So I thought it was the flu.” We now know it wasn’t. COVID-19, as it has since been named, first took hold in the Chinese city then swept the globe. In Wuhan, some citizens have decided to sue the government for what they believe was suppression of the news in the early days of the virus. By January, the first case was in the UK and by March the world witnessed lockdown, focused on maintaining distance and washing hands repeatedly. As cases mounted across the world, there were unexpected issues, like those who wanted to believe that Covid-19 was in fact a hoax. As well as the terrible human cost, with tens of thousands dead in Britain and more than 100,000 still suffering with long-term effects, the pandemic has delivered the largest economic shock to the UK in three centuries – and it isn’t over yet. But with a vaccine now being given to the most vulnerable, even with Christmas plans derailed by another surge, there is still hope for 2021.

Brexit

When Boris Johnson won last December’s election, he succeeded on a series of slogans. First up was to “Get Brexit Done”, which he did, taking Britain out of the European Union on 31 January. After that, it gets a bit more tricky. He pledged to “level up” the country, and, after coronavirus hit, suggested a “Rooseveltian approach”, invoking FDR’s New Deal, though there’s little sign much has changed yet in the “red wall” seats the Tories took from Labour. However, the most pertinent of his soundbites now appears to be the promise that he had an “oven-ready deal” with the EU over Brexit. With time running out, there’s still no trade deal in sight. In the pantheon of prime ministers, Johnson’s currently far from the top of the pile after a whirlwind 12 months. But falling at the final hurdle with Brexit could make things far worse for both the prime minister’s legacy and, more importantly, the country.

US politics

Even by the standards of Donald Trump’s presidency, 2020 has provided some eye-opening moments. Questionable presidential pardons were perhaps to be expected, as were outrageous election claims. Suggestions of injecting bleach into the body to stop coronavirus, on the other hand, were not something anyone expected of a president. As 2020 progressed, the protests in the wake of George Floyd and Breonna Taylor’s deaths took hold across the United States and with them questions over the response from heavy-handed police. Along with coronavirus, it became the big issue of American politics, neither of which Trump had any real solution too, other than to stoke flames. By summer, the Republicans were already preparing for life after Trump. Stuck in campaign mode, the president pressed on, maskless, with rally after rally, and even planned to go ahead with a Republican convention as normal. Now, with Joe Biden set to come into power in a few weeks, the question is how much havoc Trump can wreak before leaving the Oval Office – and what he does next.

Climate crisis

The year began with bushfires blazing across Australia, killing 500 million animals and more than a dozen people, with acres upon acres left scorched in their wake. But it could end on a hopeful note, as the UK looks ahead to hosting the Cop26 climate summit in November. Joe Biden’s election, and his pledge to sign the US up to the Paris Agreement again, will surely help – with climate an issue that could bring him together with British leaders. In the UK, the government’s independent climate advisers have put together recommendations for how the country can limit its carbon emissions to keep temperatures down, and it’ll take more than sending fewer emails. Instead, they say that by 2050 almost every element of our lives will have to change, from the cars we drive to what we eat, if we’re to reach net-zero emissions. But can it really be done while building a third runway at Heathrow airport?

Arabs Israel relations

Many countries have established diplomatic relations with Israel in quick succession. The decision to establish diplomatic relations by itself cannot create alliance. In case of the Arab world, the matter is different. Within each country, there are factions that are hostile to Israel. Any regime that opens relations with Israel will have to face this reality. Each state that has recognized Israel has broken a barrier. Among many Arabs, it is a violation of a fundamental principle. This process, which began with the UAE, is rooted partly in the US Middle Eastern policy that has played an important role in implicitly endorsing the process and occasionally adding a sweetener. The US also made it clear that it was withdrawing its forces from the region and reducing its commitments. That left the region without the power that held it together. These countries could and did work together, but only through secret contacts and US coordination. Without the United States, each state was left to either go it alone or form meaningful relations on the whole. The US policy forced the countries of the region to face a reality they had tried to hide.

Likely rate cut by European Central Bank

European Central Bank monetary policy announcement scheduled today is one the most important event risks of the week. Analysts should not be surprised if EUR/USD pair broke below 1.10 ahead of this rate decision.

Investors have big expectations for this meeting because of widespread deterioration in the Eurozone economy and talk of recession in Germany. EUR hit a 2-year low last week against the USD as German bund yields tumbled deeper into negative territory.

Back in July, Mario Draghi, Chief of European Central Bank brought up the benefits of a combination of measures and since then the need for stimulus intensified. While investors are preparing for a massive dose of stimulus, there's also a reasonable chance the ECB may under deliver.

The Eurozone economy needs help. Retail sales, inflation, employment and manufacturing activity slowed across the region and in Germany, growth contracted in the second quarter. The region's largest economy is crippled by weak global growth and a collapse in manufacturing. Not only did the PMI manufacturing index fall for the eighth month in a row but it reached to its weakest level in 7 years.

The Bundesbank said there's a very good chance that Germany will fall into a technical recession in the third quarter. With a tense trade war and weakening US and global growth, the grim outlook for the region is why the ECB needs to find ways to stimulate the economy.

The European Central Bank has many options including a rate cut, stronger forward guidance, a new program of asset purchases and compensation for banks to relieve the negative effects of negative interest rates. They prefer a combination of measures because they feel that a package is "more effective than a sequence of selective actions."

The market expects a minimum of a 10bp rate cut. If the central bank combines this with rate tiering or a new Quantitative Easing program, EUR/USD will sell off aggressively but if all they do is cut rates and strengthen their low rate pledge, euro will soar in disappointment.

With EUR so weak, less aggressive measures could trigger a sharp short squeeze in the currency. Unfortunately, there's resistance to a package that includes QE - one of the strongest forms of easing.

Bank of France Governor Villeroy is skeptical of the immediate need for QE while German and Dutch policy makers also believe its too early for the move.

Given the market's lofty expectations, EUR/USD traders could be setting themselves up for disappointment. Draghi could also opt for a stimulus package that does not include the most aggressive measures to leave his successor Christine Lagarde with ammo to fight a deeper slowdown.

  

Britain must keep Tony Blair out of Brexit discussion

Having roots in Pakistan, once upon a time a British Colony and a member of Common Wealth for a long time, I believed that Britain was the oldest democracy. However, this belief has been shattered after hearing that its ex-prime minister Tony Blair would steer the country out of the turmoil. In my opinion, he should have been punished for committing war crimes, the worst being his support for Iraq invasion on the premise of having weapons of mass destruction. Ideally, he should be hiding his face because tendering an apology could not save him from the ultimate fate.

In the recent past, I was engrossed with other topics that included Pakistan’s prime minister, Nawaz Sharif, facing disqualification, US president not behaving in the desired manner and his visit to Saudi Arabia, elections in Iran and ongoing war in my country’s neighborhood, Afghanistan. I confess that I missed statements of Tony Blair saying that he plans to become more involved in the debate surrounding Britain’s departure from the European Union because of the harm it would cause the country.

The 63-year-old, who was speaking on the 20th anniversary of his landslide win over John Major in the general election of 1997, told the Daily Mirror, “I am going to be taking an active part in trying to shape the policy debate and that means getting out into the country and reconnecting. This Brexit thing has given me a direct motivation to get more involved in politics. You need to get your hands dirty, and I will.” I believe Britishers should not pay any heed to his uttering.

I regret that Britisher, who are the custodian of democracy and good behavior gave him a chance to resurface, whereas he should have been completely dumped for bringing the worst disgrace to them. I will even ask a question, are the politicians from treasury and opposition benches incapable of bringing the country out of the turmoil?

My question to Tony Blair, if he is such an ardent supporter of Britain remaining in the European Union (EU), why did he keep his country out of the common currency, euro? I understand that somewhere at the back of his mind was that if Britain joins euro; it would become subservient to Germany and France.

At this juncture, both Germany and France are adamant at punishing Britain out of the EU or be ready to pay a huge cost to stay its member. If Tony Blair committed a mistake of becoming the spokesman of war monger George Bush and now living in isolation, Britain also faces isolation for its decision to quit the community. Even if the new parliament wishes to reverse the process, it would only be at the stringent conditions of the EU.

Has Pakistan-India animosity yielded any good?

During August both Pakistan and India will celebrate their  independence from the British Raj in 1947. Over the years both the countries have fought various wars, accumulated piles of conventional arms and also attained the status of ‘Atomic Powers’. They may boost of spending billions of dollars every year on buying arms but bulk of the population of both the countries live below the poverty line. My question to the rulers and citizens of both the countries is; has animosity between Pakistan and India yielded any good?

My own reply is a big no and I am sure that people from both the countries also share the same feelings, except the hawks present on either side of the border. These hawks are the product of British Raj that ruled this part of the world by following ‘divide and rule’ policy. While leaving the subcontinent it left a thorn, Kashmir. Those who don’t believe in my point of view must read the misdeeds of Toney Blair, British Prime Minister that led to attack on Iraq, a country still inferno after nearly 15 years.

While the citizens of Pakistan, India and Bangladesh may have some doubts about the economic potential of their homelands, British Raj knew the real worth when it made Indian subcontinent its colony. Even at that time the area was known as ‘Golden Sparrow’. In modern day term the area has robust agriculture and industry, treasures of minerals hard working people and above all a market comprising of billions of people.

Kindly allow me to say that had India and Pakistan not been spending billions of dollars on purchase of arms and instead using it for the development of infrastructure, educating their children and health care, these countries would have been ‘economic super powers’ and ahead of Malaysia, Singapore, Korea, Japan and even China. Spending least on education, healthcare and providing ‘safe drinking water’ have pushed these countries deeper in economic disorder, social malice and extremism.

If one looks at the most stable and fast growing economies, Germany emerges as the most outstanding one. When the Germans decided to unify East and West Germany, many critics termed it ‘dooms day’ for West Germany. However, it will be very hard to find the rudiments of East Germany now. I also say that one of the reasons Britain opted to quit European Union is also the legacy of British Raj. People of United Kingdom still don’t understand that they are no longer the super power. However, to prove their superiority they keep on interfering in the affairs of the countries commonly known as ‘Members of Common Wealth’.

Lately, anti-government demonstrations in Indian-Kashmir have attained a new hype. Hawks from both sides of the border claim that Kashmir belongs to them. The super powers and even the UN have failed in asking what the people of Kashmir want’. If one could recalled the issue of Sudan was resolved quickly and prior to that Cyprus trauma overcome, only because the super powers had the consensus.

One may ask why the super powers are not serious in resolving Kashmir issue. My own understanding is that super powers love to create disputes, develop rebel groups, provide them funds and arms to keep their armament factories running at full capacity.

Having watched the recent wars in Afghanistan, Iraq, Yemen and Syria and earlier wars in Vietnam and Korea, I will not hesitate even for a second to call these ‘Proxy Wars’. The irony is that rulers become a puppet of super powers and ultimately meet the fate of Saddam Husain, Anwar Sadat, Ziaul Haq, Indra Gandhi, Mujeeb-ur-Rehman and the list can continue.  

While the proxy wars bring nothing except destruction to the countries where these are being fought, super powers continue to grow stronger and have ample funds to promote proxy war. However, they usually hide their ugly faces behind the multilateral lenders and NGOs and talking about refugees issue. It is never too late to mend. People of the third world must realize that super powers thrive on proxy wars and they get nothing but destruction and killing of innocent people.

Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Pakistan stock market closes week almost flat

For the week ended July 22, 2016 the benchmark of Pakistan Stock Exchange PSX-100 closed almost flat as compared to a week ago. The market managed to close above 39,000. However, the overall performance was not disappointing. CYTD returns were reported at above 19 percent. Additionally, the month to date foreign inflow of US$31.7 million is a strong indicator for foreign investments picking pace, following Pakistan’s re‐entry into the EM club.

News flow impacting market during the week included: 1) in the T‐Bill auction conducted on Wednesday, cut‐off yields for 3, 6 and 12 months posted decline, where banks aggressively participated in the auction with bids amounting to Rs740.9 billion against the target of Rs200 billion, 2) net inflow of almost $600 million from China, foreign direct investment (FDI) in Pakistan surged 38.8% as Pakistan received FDI of US$1.28 billion during 2015-16, which was US$358.2 million higher than receipts a year ago.The unusual jump in FDI in the last month of 2015‐16 was on the back of an inflow of US$138.5 million in the telecommunications sector, 3) SECP has formally sent the final draft of the Companies Bill, 2016 to the Ministry of Finance for initiating necessary legislative process and its approval by the Parliament and 4) Textile exports went down by one billion dollars during last financial year due to massive decline in cotton crop production and slowdown in the economy of China pushing Pakistan's textiles and clothing exports to US$12.45 billion during FY16.

Leaders exhibiting performance over the week were: ASTL, NCL, and PSMC (+7.1%WoW), while laggards were FFBL, DAWH and HASCOL. Average daily traded volume grew by 7%WoW to 207 million shares, where SNGP, DFML and PAEL were the volume leaders.

Considering the stellar run‐up in the last quarter of the outgoing FY16 gaining 10.7% during the period), analysts expect the market to enter a consolidation phase. Directionless trading in the absence of major triggers may prevail. Market participants are advised to closely follow: 1) political developments as the opposition plans to protest against inaction on Panama leaks investigations, 2) fertilizer offtake numbers for the month of June'16, gauging the sensitivity of recent subsidies on demand and, 3) details of GoP policy measures in response to the final meeting with the IMF over the release of EFF's last tranche (negotiations start July 27th). Additionally, earnings announcement may fuel strong sentiment for consensus beating stocks.

Firming up in June'16, the global commodity index rose by 3.5%MoM. While losing some ground on account of Brexit and a strengthening US$ as a consequence, oil prices consolidated around US$48/bbl whereas prices of coal were up 6.4%MoM on supply disruptions in major markets and cotton witnessed easing supply concerns depicted strength during the month under review. Steel and Urea prices declined on account of excess supplies amid a weak demand outlook. While recovery has been steady during June’16, most commodity prices still remain at their multi‐year lows. Analysts expect prices to consolidate going forward; however a sustainable reversal of the downtrend remains contingent on an improving demand scenario.

Current Account deficit for June'16 was recorded at US$61 million lower than US$252 million in June'15 (US$792 million in May'16) where higher trade deficit was countered by healthy remittance flow for the month was US$2.07 billion, up 13.8%YoY. This implies, FY16 current account marking a deficit of US$2.52 billion, lower 6.8%YoY reflecting: 1) expanding trade deficit, up +8%YoY as weak exports restricted savings from oil imports, 2) steady remittance inflows (up 6.4%YoY) and 3) US$713 million CSF payments. Going forward, analysts expect slight pressures to mount and project current account to post deficit of US$5.1 billion in FY17 with trade deficit increase of 11%YoY: on 1) US$45/bbl assumption for crude oil and 2) limited recovery in exports on low cost competitiveness. However, positive surprises can emerge if CSF payments materialize (US$900 million approved for next year) and on higher than expected growth in remittances.

Pakistan Market: Daily trading volume up 35 percent

The benchmark of Pakistan Stock Exchange PSX-100 resumed its pre-Brexit bullish momentum after Eid holidays, touching an all-time high to close at 39,188 level, up 3.7%WoW. As concerns eased slightly, the market was further supported by additional stimulus announced by Japan and stronger data from the U.S. coupled with recovery in crude oil prices, all favorable for the local bourse. Overall activity at the market improved drastically, average daily traded volume for the week increased by 35.5%WoW to 193.8 million shares.

 Key news flows during the week included: 1) Privatization Commission approved offloading of the government remaining 40.25% stake in KAPCO and Expressions of Interest from prospective bidders was invited, 2) three foreign investors including Shanghai Stock Exchange (SSE) have expressed interest in acquiring a stake of up to 40% in the Pakistan Stock Exchange, 3) total deposits of the banking industry crossed Rs10 trillion as of Jun'16 , up 10%YoY as compared to Rs9.14 trillion at the end of last financial year, 4) GoP announced a plan to lay an oil pipeline from Gwadar to China for the export of crude and task given to state construction firm Frontier Works Organization, and 5) GoP raised over Rs236 billion through auction of PIBs with cut-off yields for 3, 5 and 10-year papers declining noticeably.

Performance leaders during the week were: HASCOL, INDU, PIOC and SNGP; while laggards included: EFOODS, ABL, KAPCO and FATIMA. Volume leaders during the week: KEL, SNGP, DCL, EFERT and TRG. Foreign participation improved significantly where net inflow during the week amounted to US$21.4 million as against net outflow of US$1.2 million in last five sessions.

The market is still likely to come under pressure due to the global developments but analysts believe it could sustain current levels over the short term. Support should come from results season commencing next week where major sectors are expected to post strong earnings performance. However, risks for a pullback will linger in the form of: 1) political developments gaining prominence, 2) oil price swings likely to impact the local market, 2) another rate cut in the upcoming monetary policy proving negative for banking scrips. On the global front, upcoming US FOMC meeting and development on UK‐EU negotiations need to be tracked with implications for growing participation.

The IMF recently released its staff level report for the second last review under the IMF EFF stressing the country to continue structural reforms beyond the program's conclusion. Commending Pakistan on its strong performance on the program so far, the report also reiterates largely positive macro outlook though risks remain in the form of weak trade dynamics, policy slippages and political noise. With only one review left, IMF has added two structural benchmarks related to energy sector namely: 1) KAPCO's sell‐off and 2) updating plan for the resolution of circular debt. The twelfth review entailing disbursement of US$100 million is scheduled for end‐Sep'16 where successful achievement of targets would mark the conclusion of the facility ‐ the first for Pakistan. In line with our expectations, GoP will not be entering a new IMF agreement owing to stable external metrics however, GoP is expected to remain engaged in a consultative process with the IMF though without imposition of targets.