Op Ed: Britain at a crossroads as FX flourishes while traditional assets fade

The condition of the British economy has been turbulent to say the least over the past six years, a situation which was spearheaded by the collapse of the majority of the nation’s major banking institutions in 2008 due to a series of factors including unserviceable debt resulting from high risk mortgage lending and the extension of credit facilities to those who were unable to service the commitment.

The ensuing part-nationalization of many banks, plus the inability to secure credit for many small and large businesses which had become accustomed to operating on credit resulted in a prolonged recession which still blights the national economy today, as well as the added burden of bolstering a troubled European Union as an already cash-strapped treasury continues to fund the ailing euro zone.

Factors such as these have placed large obstacles in the path of financial growth, and have not been good for the banks, which subsequent to their collective demise have been penalized by regulators for manipulating LIBOR and FX benchmarks as well as been made liable for astronomical golden handshakes for former executives such as former RBS chief Fred Goodwin whose judgement was instrumental in the bank to the precipice in the first place.

Despite this chain of events, and the opinion among British government officials that the recession is far from over and that it may linger on for several years, the FX industry in Britain is going from strength to strength, attracting overseas investment from companies wishing to offer CFD trading to a global audience, as well as those seeking to establish themselves among London’s highly prestigious electronic trading firms and serve the domestic retail and institutional market, itself booming at present.

The dichotomy between the powerhouse which is London’s electronic trading firms and not only Britain’s non-financial markets sector which is decreasing just as quickly as the financial sector is increasing, but the traditional banking sector and non-FX assets such as crude oil, is wider than ever.

Whilst firms such as Sucden Financial, a commodities giant whose eFX division provides liquidity to FX brokers globally, recently reported record activity under the steerage of new Head of eFX Peter Brooks, GAIN Capital confidently purchased City Index for $118 million and ETX Capital acquires technology provider Ariel Communications as well as Irish spread betting company Shelbourne Markets, oil prices are at low, causing low points across Britain’s wider financial markets economy.

Perhaps one of the matters which is most concerning is that the FX industry’s high points have very little effect whatsoever on the buying public, as the asset which is being traded is purely a monetary unit against a different monetary unit overseas, with the difference in value fluctuating against each other. In cash-strapped Britain, it is unlikely that a member of the public whose every day activities have no connection to the FX business will even concern himself with the multi billion dollar activities of such companies.

Conversely, the price of crude oil affects everyone’s daily life. In a report by the Guardian last week, it was apparent that the big four supermarkets (Tesco, Morrisons, Asda, Sainsburys) sliced another 2p off the price of fuel on Friday in reaction to the crude slump. When the price of oil was $60 in December 2006, the price of petrol at the pumps reached 88.2p a litre and diesel 93.7p. This compares with a current average price – before the wave of 2p cuts on Friday – of 122.4p for petrol and 126.95p for diesel.

Bearing in mind that British motorists have stuck doggedly to internal combustion, and in particular diesel as a method of propulsion for their vehicles and have not embraced the electric vehicle in the way that North America has, this is important.

As far as electric vehicles are concerned, Californian manufacturer Tesla has become one of the most popular stocks to trade in, resulting in not only a potential worry for the established manufacturers, but also if this technology catches on world wide, more drops in crude oil prices, whilst retail FX companies such as Saxo Bank and IG Group add the stock to their proprietary platforms and shrewd investors trade it from the comfort of their own laptop computers.

This is great for consumers, but bad for the profits of the companies which employ tens of thousands across Great Britain, and are in fierce competition with eachother in terms of pricing, thus margins are getting increasingly tight.

British motorists have been subject to increases in the fuel duty and VAT levied by the government. Unless the government cuts fuel duty and VAT, the cost of petrol and diesel might not fall to the levels seen on the forecourt eight years ago.

The AA’s data has over the years shown that there is usually a time delay between pump prices falling and motorists using their vehicles more, so families may choose to spend their savings on food rather than drive more.

The North Sea offshore oil industry was taxable during two years (2012 and 2013) at £6.5bn and is an important mainstay of the Scottish economy, with vast unemployment and deindustrialization, as well as a large percentage of welfare dependency in Scotland, the oil industry is vital to providing the Scottish government with the means to ensure stability.

Alex Salmond, the former Scottish first minister who led the campaign for Scotland’s independence during which time he gained a reputation as a socialist firebrand, argued that $24 trillion (£15 trillion) worth of oil and gas was still waiting to be extracted, but these figures were premised on a crude price of $100 a barrel. An oil price substantially below that would complicate the Scottish National Party’s costings for an independent Scotland, which would be looking to the North Sea for a sizeable contribution in tax and jobs.

The offshore lobby group Oil & Gas UK stated to the Guardian that even before the recent fall in crude prices there had been a huge drop-off in exploration activity in the North Sea. The organisation has been lobbying George Osborne hard to reduce taxes in his autumn statement next week in a move to improve the situation.

Mike Tholen, Oil & Gas UK’s economics director, said on Friday that a prolonged period of $60 oil would be disastrous for investment and jobs insofar as the decommissioning oil platforms would become the biggest activity and that would be a crying shame. He further affirmed that it would cost the Exchequer a fortune to remove the industrial hardware, with the result being valuable oil left in the ground.

In this circumstance, apart from industrial considerations and the purchasing behavior of the general public, the drop in oil prices could well be a double-edged sword in that at a value of $60, a reduction in inflation could emerge, likely much to the delight of the Bank of England which, like other central banks, is concenrned about about how to pitch interest rates when goods and service prices are rising.

Freed from the burden of heavy capital-expenditure engineering projects which the oil industry requires, the FX business is yet again removed from current conditions. An example being that these low prices in crude oil could result in the fracking industry suffering due to it having bought at low prices.

“The shale boom is on a par with the dot-com boom,” Russian oil baron Leonid Fedun of OAO Lukoil told Bloomberg. “The strong players will remain, the weak ones will vanish.”

Across the pond in North America, it’s a similar story for motorists but fracking is far more advanced. The reduction in petroleum product prices have saved U.S. consumers an estimated $63 to $248 billion in 2013 and estimated cumulative savings of between $165 and $624 billion from 2008 to 2013,” stated a report by the American Petroleum Institute

OPEC decision to maintain a production target of 30 million barrels a day was seen as a reflection of its members view that the short term pain was necessary to pressure rival producers in the U.S., who need moderate oil prices to break even. Saudi Arabia, the leader of OPEC, appears to be hoping to drive prices below the level at which shale oil production is economical. Experts say shale oil production turns too costly at the $60 a barrel level.

In the U.S., consumers’ joy at pump prices falling toward $2 a gallon could be tempered by fears the burgeoning economy in places like the Dakotas, Texas and Oklahoma could be hurt by the lower cost. The industry is credited with creating nearly 2 million jobs, a number projected to double by 2035.

“If prices don’t recover soon this could be the beginning of the end of the Great American oil fracking boom,” Forbes’ Christopher Helman recently wrote. Larger energy companies with money of their own to invest might be able to ride out the dip, but smaller, highly-leveraged oil and gas companies will have problems, he said.

Fracking is also subject to another difficulty which evades the FX industry – opposing sentiment to locations where it is carried out. FX trading can be carried out from any location, anywhere, at any time without any large engineering, whereas fracking is site-specific……

Not in my back yard…..


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