Sterling’s” flash crash “on Thursday night managed to dominate newspapers and the broader financial media on Friday. Flash crashes are often blamed on the development of algorithmic trading. It appears easier to explain an unexplained event by blaming a little understood trading strategy. The increased development and use of technology within capital markets, in an attempt to create greater visibility, liquidity and speed of execution has led to consequences. Those obvious consequences are the growth of those who try to profit in this new world. The world of the old fashioned trader is long gone, what we have now are computer programmers who are not really interested in the underlying fundamentals but more in the flows of money and paths of least resistance. The regulators often struggle to keep up with the changes and innovation. Who knows if algorithmic trading was to blame, the likelihood is that this event was not just one thing but a combination of events coming together.
Post the Brexit vote sterling had remained pretty stable after the initial fall, as the rhetoric on all sides picks up so does the uncertainty and this has led to the increased volatility in the currency. Theresa May’s open criticism of Mark Carney’s recent policy action has probably not helped the currency. The FTSE 100 benefitting from the currency woes has been well flagged across the papers. The FTSE 250 index that comprises of the next level of companies by market capitalisation, has not partaken in the recent recovery currently trading close to where it was in early August.
So far the UK bond market has been little effected by the recent news flow. More than a third of gilts not owned by the Bank of England are owned by foreign investors. Obviously as the currency weakens so does the value of their bonds in their domestic currency. There may a point when foreign investors decide to sell.
Looking to the week ahead the next round of the Clinton, Trump debates takes place overnight. Trump must be looking forward to this about as much a root canal treatment. Brexit is likely to continue to make headlines, after last week’s action it will be interesting to see if sentiment in the currency has reached enough of a low for it to stage a recovery.
Tuesday see’s the start of the earnings season as the traditional show opener Alcoa reports. We also get reports from some of America’s leading banks. Macro events on Tuesday include the ZEW German business confidence sentiment index.
On Wednesday the Federal Reserve release the minutes from the September meeting in which they decided to leave rates where they were. On Friday Janet Yellen is the key note speaker at the 60th annual economics conference hosted this year in the US. Mark Carney and a few of his band will be appearing at a series of public events on how the Bank can better serve society.