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Financial Markets-Weekly Markets Update 03.09.2018

In the UK last Wednesday we saw a glimmer of hope on Brexit as EU negotiator Barnier said “We are prepared to offer a partnership with Britain such as has never been seen with any other third country.”  This saw the pound rise two cents against the US Dollar to nearly 1.3050 as the markets initially took this as a sign that the EU would be prepared to negotiate.



At the same time Mr Barnier extended the negotiation deadline from October to November. If we look at the fact he clearly sees that more time is needed and the fact his partnership statement does not mean they will give the concessions the UK are looking for, we saw the optimism naturally fade as the week played out, with gains being reversed.


The EU is however in a position where maintaining existing trade partners is required. Last week Donald Trump decided to end the EU’s hope that the Automotive industry would remain free of the trade sanctions. This comes as a great disappointment for the EU, with this being a huge part of their trade with the US.


Trump did show that he can strike a deal rather than just tear them up when he finally reached agreement with Mexico separately, rather than through the NAFTA process. This of course leaves Canada in a tentative situation, with no negotiation seemingly forthcoming. Naturally this weighed on the Canadian Dollar, with the proximity meaning a huge amount of two-way trade between the nations.


We also heard that Trump could issue a further $200 Billion of trade sanctions on China as soon as the end of this week. China, having overtaken Canada this year as the US’s largest trade partner, will be naturally aggrieved. They have rightfully complained to the World Trade Organisation (WTO) about the actions of the US. In response, Donald Trump announced that he would be prepared to remove the US as a participator in the WTO. 


In Emerging Markets, last week saw a continuous grind lower in the South African Rand and the Turkish Lira. Politically and economically there were no significant changes, hence the continuation of position unwinding and negative speculators pushing at these markets.  We have previously mentioned that in order to address the currency and inflation situation in Turkey, Erdogan needs to hike interest rates, which he has always expressed he was not prepared to do. However, we have now heard from the Turkish Central Bank that they may be prepared to address the issue at their next monetary policy meeting in September, bringing a slight pullback in the Lira. Drastic action is needed however. Whether it will be as aggressive as the Argentinean interest rate hike we saw last week, taking rates from 45% to 60% in an attempt to fight off currency devaluation, remains to be seen.



Naturally, with the continuation and perhaps escalation of the “Trade War” and no evidential progress in the Emerging Markets, global stocks traded heavily across the world, with only US markets remaining buoyant, where we saw the S&P make a historic high of $2,915. Whilst it did retreat from those highs, the pull-back was modest.


This week

From a monetary policy perspective, we get interest rate decisions from two developed economies. In Australia, a country that has been struggling politically of late with continuous leadership changes, we get their interest rate decision on Tuesday. They are expected to leave rates at 1.5% with the markets not pricing “lift off” until September 2019.  We know that Canada are closer to hiking rates, but again we don’t expect to see any change, with rates set to also continue at 1.5%. Expectation there is for a hike next month which certainly does make this a potentially more volatile event. It will be interesting to see what effect the comment on the lack of progress on the NAFTA will have on the rate path.


With little of note on the UK card this week just some Manufacturing data and Halifax house prices. All eyes remain on the UK’s Raab and EU’s Barnier for comments on Brexit. In the eurozone the key data points will be Eurozone GDP, which is forecast to be slightly positive and Retail Sales, which is forecast to be moderately negative


In the US it’s a big week for Employment data.  With the US economy seemingly going from strength to strength, this will give us a strong idea of the ongoing strength. Friday brings Non-farm payrolls. Last month’s number was on the poorer side, coming in at 157k new jobs created. A typical average number for payrolls is around 180k, but this poor performance was attributed to the collapse of Toys “R” Us, the latest company to fall foul of Amazon’s dominance. This month, forecasts are for 190k jobs created and also a slight improvement to the unemployment rate, from 3.9% to 3.8%.  We also get the average earnings data at the same time, which also bears huge significance.


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