Any Excuse To Be Cheerful

August 23, 2019

 

Sometimes the markets need an excuse to be cheerful. This week was case in point. Sterling bounced back to a  3-week high this week - not necessarily due to anything positive but because of the absence of anything negative!

 

The Prime Minister, Boris Johnson visited the German and French capitals this week to meet the leaders of the two countries. This was his very first outing as Prime Minister and both leaders used warm language in response to his government's position that an alternative to the backstop could be found. He was given 30 days to produce such an alternative. An alternative that a government he served for the previous three years has not been able to find.

 

It is importnt to note that in the meetings with both leaders, no change to the Withdrawal Agreement, was made nor implied. On reporting of the meeting between the UK PM and the German Chancellor, today's FT puts it like this:

'. . . “She did not move one millimetre,” said Norbert Röttgen, a senior lawmaker from the Chancellor’s Christian Democratic Union party and the head of the German parliament’s Foreign Affairs committee. “At no point did she suggest that Germany is ready to abandon the backstop. The German position is the same as the European position.”. . . '

 

Nevertheless, this was the cheer the market was looking for, hence Sterling's uptick.

 

Following the recent market volatility, major equity and government bond markets showed some signs of stability over the past week. US and UK 10-year yields rose above 1.6% and 0.5%, respectively. In the currency space, the pound gained ground against its peers – edging above $1.22 and €1.10 – on glimmers of hope that a no-deal Brexit on 31 October can be averted, although the situation remains fluid. There appeared be no major shifts in UK and EU official positions on the Irish backstop issue. However, the main takeaway from PM Johnson’s meetings with German Chancellor Merkel and French President Macron was that both sides are engaging to find a solution that protects the EU single market without the need for a border in Northern Ireland. Mrs Merkel even suggested a 30-day window for the UK to come up with practical solutions, although she later said it was not literal but symbolic of the short timeframe. In the meantime, parliament will return from its summer recess on 3 September, with some MPs looking at ways to prevent a no deal Brexit. The other major event this week was Fed Chairman Powell’s eagerly awaited speech at the Jackson Hole Symposium (which continues until Saturday), especially since the re-escalation of trade tensions after the 31 July FOMC meeting. The minutes of that meeting, when rates were cut by 25bps, showed a marked difference of opinion among rate-setters, with some preferring a larger reduction and others unconvinced of the need to cut at all. Powell’s comments at Jackson Hole appeared to tread a cautious middle line. He described the US economy as being in a “favourable place”, but noted that it faces “significant risks” relating to slower global growth. Overall, there were no strong hints of a September rate cut or of the series of reductions that markets are anticipating.

 

The G7 summit of leaders in Biarritz, France begins on Saturday and could set the tone for next week. Discussions will encompass a wide range of topics including foreign policy, the global economy and the environment. Discussions about the global economy are expected to take place on Sunday. With President Trump in attendance, prospects for a de-escalation of global trade tensions, including a deal with China, will be examined. However, China this week announced additional tariffs on US goods to take effect in September and December in retaliation to US measures. Markets will also be watching to see whether Mr Trump will turn his sights to Europe in response to what he considers to be unfair restrictions on US firms’ access to agricultural markets and France’s proposed digital tax on tech companies.

 

 

In the Eurozone, attention remains on the state of the economy and the likely ECB policy response in September, as well as Italian politics. This week’s Eurozone ‘flash’ PMI survey for August improved unexpectedly, but the overall composite index of 51.8 is consistent with only weakly positive growth. In the ECB minutes of its July meeting, a view was expressed that various policy easing options should be seen as a ‘package’, including the possibility of combining rate cuts and a resumption of net asset purchases. Italian political uncertainties returned, as the League party pulled out of the coalition with Five Star Movement, seemingly in an attempt to capitalise on rising support in possible new elections. President Mattarella has given political parties until Tuesday to form a new government. There has been speculation of a tie-up between the Five Star Movement and centre-left Democratic Party, despite policy differences. A number of Eurozone data releases will be released next week. The most important will be the German IFO business survey (Mon) and the Eurozone ‘flash’ CPI (Fri) – both for August. Despite the uptick in the German flash PMI, we look for a further moderation in the headline IFO index to 95.3 from 95.7, which would be the fifth consecutive decline. Germany’s economy contracted marginally by 0.1%q/q in Q2 (which is expected to be confirmed next week) and the Bundesbank warned that a further fall could take place in Q3 owing to global trade tensions and Brexit uncertainties. Meanwhile, we expect Eurozone ‘flash’ August CPI to be steady at 1.0%, well below the ECB’s inflation goal. Core CPI, excluding the volatile food and energy components, is forecast to edge up to 1.0% from 0.9%, but headline inflation will be weighed down by lower energy prices. As usual, the Eurozone figures will be preceded by releases for Germany, Spain and France.

 

The second estimate of US Q2 GDP (Thu) may show a marginal downward revision from the annualised 2.1% advance estimate. A sense of how Q3 is shaping up will come from July ‘hard’ data including durable goods orders (Mon), the goods trade balance (Thu) and personal spending (Fri), as well as August surveys including Conference Board consumer confidence (Tue) and the Dallas/Richmond Fed manufacturing surveys (Mon/Tue). The Atlanta Fed’s Q3 GDP now cast is 2.2%, similar to the current consensus forecast of 2.1%. It looks to be a quieter, holiday-shortened week in  the UK. The most notable data releases are the Bank of England July lending data, including mortgage approvals, and GfK Consumer Confidence (all due on Fri). Analysts are looking for a slight improvement in the headline Consumer Confidence Index to -9 from -10. The dichotomy between relatively positive personal finances and a more negative view of the general economic outlook among consumers remains.

 

To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

 

See you next week!

 

 

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