Curtains For May - Jump For Sterling
Finally, the most anticipated Prime Ministerial resignation has happened and Sterling immediately jumped against both the Euro and the Greenback. In fact, it had been on an upward trend this morning as rumours of her immminent departure intensified. For most of this year sterling has traded within a relatively narrow range as markets awaited further clarity on Brexit. However, over the last couple of weeks it has slipped sharply and this week it moved below 1.27 against the US dollar (its lowest level since January) and below 1.18 versus the euro (a post mid-Jan low). The slide reflected the ramping up of uncertainty as UK PM May’s plans to bring the EU Withdrawal Bill back to Parliament unravelled. That culminated today in the PM announcing that she will step down as party leader. She will formally resign on Friday 7th June but will stay on as caretaker PM until a new Conservative Party leader is chosen.
In the meantime, markets will continue to speculate about the potential Brexit strategy of the next leader and the extent to which she or he will be willing to pursue a ‘no deal’ exit. Regardless of who is the new leader, they will still face a House of Commons where a majority of MPs - as the recent Indicative Votes showed, oppose leaving the EU without a deal.
The past week was another rocky one for equity markets as the escalation in trade tensions between the US and China continued to weigh on sentiment. Meanwhile, government bond yields led by US Treasuries have fallen as investors look for safe havens. There have been no further sign of negotiations restarting and there is still no confirmed date for any new meetings ahead of the plans for the US and Chinese Presidents to talk at the G20 summit in late May. The US is still threatening to raise tariffs on other imports from China but has provided no further information on the timing of this.
Instead, the past week has seen a change of tactic, with the US government threatening restrictions on the access of some Chinese companies to US technology. Markets will be looking for further information on any potential restraints on technology exports in the coming days.
The second reading for Q1 GDP is not expected to change significantly from the initial estimate. That showed surprisingly strong overall growth, although consumer spending (typically the primary driver of the economy) slowed compared to Q4. More positively, an acceleration in spending in March meant that the quarter ended on a strong note and markets will be looking to see whether the April data due Friday shows that continuing. However, disappointing April retail sales point to another deceleration. The Fed’s preferred inflation measure, the consumer expenditure deflator, will be released at the same time and is expected to show that inflation continued to run below target in April.
The four largest Eurozone economies all release May CPI readings next week, ahead of the estimate for the region as a whole the following Tuesday. Eurozone inflation picked up in April but much of that seemed to reflect a later Easter compared to 2018. Consequently analysts expect inflation to have moderated in May. This week’s PMI and Germany IFO May outturns provided further indications that the surprisingly strong Q1 GDP belied the weak underlying pace and so Q2 growth is likely to slip. Next week’s Eurozone Economic Confidence measure will provide further guidance on this, with the already released consumer confidence indicator pointing to a modest increase.
There will be an EU summit on Tuesday’s where the repercussions of this week’s European Parliamentary elections will be discussed. As voting continues in some countries until Sunday the results will not be known until early next week, although populist candidates are expected to have done well. EU leaders will also need to talk about the key EU leadership roles that will need to be filled this year, including the Presidents of the Commission, the Council and the ECB. Media reports suggest that they will also discuss the implications for Brexit of PM May’s resignation. It may be difficult for them to reach firm conclusions on this until they know the identity of her successor.
However, it is very difficult to tell whether they would agree to potential requests to renegotiate terms and/or for a further extension of the deadline. This is partly because of the complexity of each leader's own internal domestic politics, which in turn could be influenced by the MEP election; results of which are due on Sunday night/Monday morning.
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