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KYLIN TALK | Weekly Markets Update 21.01.2019

The trend of positivity that we have seen in the markets continued in this last politically crucial trading week. If we start in the UK, where Prime Minister Theresa May’s government endured her toughest test to date on Brexit. Tuesday brought a vote of confidence in her Brexit deal with the House of Commons. As was widely expected the bill was unanimously rejected with a record loss by 230 votes.  Whilst the headlines and social media outlets talked of embarrassment and poured scorn on the struggling PM, the markets had a slightly different take on the events. The overriding fear for the UK is a departure from the Eurozone with a “No Deal”, the transpiring events and rhetoric we are hearing from Westminster seems to be vastly reducing the potential for this outcome, with an extension of the Article 50 time period to secure a vote, looking the most probable outcome.  

In the aftermath of Tuesday’s disastrous vote, opposition leader Jeremy Corbyn seized the opportunity to call a vote of no confidence in the Government but if anything, this brought dwindling support back to the PM as the Irish DUP and the internal thorn in her side, the ERG chose to back her rather than potentially open the door to a General Election or a further referendum. This brought continued upward momentum to the GBP/USD rate, as we saw it climb from the post-vote, knee jerk dip below 1.2700 to above 1.3000 towards the end of the week (before pulling back slightly).  On Monday the PM will deliver her revised Brexit bill, which is not expected to be dissimilar to the first, the fact she has not yet called for an extension of Article 50 suggests she has confidence in it, or perhaps she is relying on the support of parties to fend off a Labour challenge. But market perception is that of the available eventualities, extension of the negotiations or a second referendum seem the most probable and both are deemed positive for the UK and Pound, as has been reflected in the price action.

The positive tone in global stocks was again fuelled this week, led by the US Markets after further optimistic comments regarding the US-Sino Trade negotiation and continued cautionary comments regarding the path of US interest rate from members of the Federal Reserve. Despite the ongoing shutdown or perhaps in spite of it, Donald Trump has been speaking very positively of the trade negotiations with China. A leaked sources piece on Thursday night sent the markets soaring when it was mentioned that the US may look to reduce trade tariffs to China, despite this being swiftly discounted by Stephen Mnuchin, US Treasury Secretary. Global markets are buying into the positive progress with all major indices starting the year positively, and all major US indices sitting over 10% up year to date.  Of course, this is fuelled not only by the progression of Trade War talks but some good earnings results, plus the Federal Reserve vocalising caution on the hiking cycle that brought negative effects to the stock market towards the end of 2018.

This does raise a very interesting question regarding the recent shift from the Fed.  Their caution on interest rates came after a drop in the stock market, as fears grew that the US could not deal with higher rates whilst absorbing the effects of the trade war simultaneously. However, should we start to see tangible progression on that front, coupled with the continued solid data which shows real strength for the US economy, how long will it be until the Fed have justifiable cause to get back on track for the two interest rate hikes previously expected for this year.  For now, however, markets are most certainly buying into the positivity and investment is drifting out of the perceived safer assets, like the Japanese Yen, more significantly the Swiss Franc and of course Gold, falling from the 1295 area to 1280 at Fridays close.

As well as the fall in safe haven products last week, the Euro also met with heavy selling pressure. The gains in the USD brought EUR/USD from 1.1500 to 1.1350. There was also naturally, heavy selling seen against the Pound and despite the falls seen in the JPY and CHF the EUR only delivered modest gains against them. There were several contributing factors to this, including ongoing political turmoil in France and Italy, plus Greek politics again flaring as Tsipras called and narrowly survived a vote of no confidence last week. But one of the main factors is monetary policy, and the European Central Banks ability to firm up their ultra-loose policy and beginning hiking rates by the previously guided “summer 2019” date expected. Disappointing inflation data remains the key concern for ECB head Mario Draghi, and as we head into Thursdays Monetary Policy decision, he took the step to forewarn the markets last week that significant improvement would be required to meet the target, sending the Euro currency lower. Therefore, much will be made of any comments from Draghi on Thursday, regarding his timeline for tightening. Given the recent data and the political backdrop, many are expecting an extension of the timeline.

 

Upcoming Economic Data for the week ahead

In the UK there will of course be a steady stream of Brexit news, starting with the delivery of the Prime Ministers revised Brexit plan on Monday.  Naturally we will be expecting some progression towards an extension of the March 29th deadline set by the EU this week. In terms of “typical” data, Tuesday brings the all-important Average Earnings data, which we saw strengthen towards the end of last year, and this month forecasts are that it will match the 3.3% seen in December’s release. Unemployment Claimant count data released at the same time is expected to improve slightly from 21.9k to 20k.  The next and last piece of meaningful data comes on Friday with Mortgage Approval numbers expected to fall slightly from 39.4k to 34k.

In the US whilst the Government shutdown persists data could of course be hindered due to the lack of required resource to produce it. The shutdown and lack of earnings will of course have a dragging effect on the data in the coming months. So, this week potentially we have US Existing home sales on Tuesday with a slight decline from 5.32m to 5.25m expected. Thursday brings both US Manufacturing and Services PMI data before probably the more significant Durable goods orders on Friday.

In the Eurozone the main event of the week will be the follow up from last week’s comments from ECB Chief Mario Draghi. On Thursday we will get the most recent interest rate decision from the ECB, as has become typical, we expect no movement on interest rates. It will be the thoughts of Draghi and his committee, conveyed in the press conference afterwards that will set the direction of the markets.

In Japan we have their interest rate policy meeting on Wednesday early in the Asian session. There is no change expected to either the short-term rate at -0.1% or the 10-year JGB purchase operations. With only light potential seen for tapering of the JGB.

Have a great week ahead!

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