Duncan Donald

Mon, Jul 22

KYLIN TALK | Weekly Markets Update 22.07.19

This week marks the announcement of the long-awaited UK leadership contest to elect a new Prime Minister and leader of the Conservative Party. The decision comes on Tuesday and will, of course, be the driving factor in the UK markets this week.

The result is elected upon by the signed-up members of the Conservative party rather than public vote and it is widely expected that Boris Johnson will run out victorious over Jeremy Hunt with him clearly ahead in the polls. With both candidates having expressed the desire to pull the UK out of the EU on the October 31st deadline should a deal not be forthcoming, we have naturally seen the pound wane during the run into the vote.

Whilst Boris Johnson is likely to take up the position at number 10 Downing Street on Tuesday in place of the outgoing Theresa May, the key question remains what he thinks he can achieve that she couldn’t. One of the biggest concerns is with Boris, he is largely unreadable as a politician, naturally throughout his campaign he has largely conformed to party desires to secure the role, but when she/the power shifts his first actions will be closely scrutinized, especially discussions with the EU.



In light of Boris’s “Brexit means Brexit” hard-line exit agenda over the weekend we heard from 3 current Conservative MP’s Tobias Elwood, David Gauke and most notably Philip Hammond, the current UK Chancellor, stating they will quit their roles should he obtain the role, as they did not sign up for hard Brexit.

From a data perspective, there was slightly more optimism for the UK markets last week as Retail sales bounced back to a positive reading, employment still showed modest growth and Unemployment fell slightly, all showing that Inflation has the potential to remain around the 2% Bank of England target out with the Brexit curveball.

Last week we saw the about-turn of the Federal Reserve Open Market Committee (FOMC) taken a step further than many expected. Having shifted from a bullish (rate hiking) stance to a bearish (rate-cutting) stance in the last month, committee member John Williams opened up the potential of a surprising 50bps cut at their meeting next week.

Whilst the US economy had been softening prior, the most recent data has certainly been on the more optimistic side so naturally, this comment took the market by surprise and send the US Dollar down and the low rate loving stock markets soaring. This week second-quarter US GDP data will give us a real health check on the economy with estimates indication we could see a pullback to 1.8% from 3.1%.


This week also brings the Mueller testimony to congress on Wednesday which whilst not expected to bring anything too unexpected to the table it will undoubtedly cause further friction between President Trump and the Democrat party at a time where they are crucially against the clock to form agreement on Government Funding and raising the debt ceiling to ensure there is no shortfall.

With the summer holiday shutdown, it's imperative that agreement is sought and quickly.

In the Eurozone, as we await new starters of Ursula von der Leyen the new EU President-Elect and Christine Lagarde the Head of the ECB we head into a busy week for the ECB with their interest rate decision on Thursday.

All eyes will be on what they see as the next steps for the struggling Eurozone economy. It is expected that they make mention of the possibility that interest rates could go lower, whilst no rate movement is forecast the market predicts they will open the door to cutting rates should market conditions require.

The big question surrounds the use of further quantitative easing. Having just shored up the last round of QE it is believed the ECB could again use it as a tool to stimulate the economy, with Lagarde being a known supporter of it, however the expectation is that the ECB will avoid mention at this meeting, however, expect it to be at the forefront of questions received in the press conference.


The week ahead:


Monday - A very quiet start to what will be a busy week. No significant data expected just speeches from the Bank of Japan’s Kuroda at 4 pm UK time and Reserve Bank of Australia’s Kent at 11.30pm.

Tuesday - The key event will be the announcement of the new UK Prime Minister, no time has been specified as yet.  In the UK CBI Industrial orders come in the morning. In the US session, we get US Existing home sales and the Richmond Manufacturing index.  Late in the session comes the New Zealand Trade Balance

Wednesday - It’s the start of a busy week for the Eurozone as PMI data from France, Germany and the Eurozone collective is released early in the session. High street lending data from the UK is next up before Manufacturing and Services PMI’s and New home sales from the states in the afternoon.

Thursday - Early in the Australian session we hear from the Reserve Bank of Australia’s Lowe. In the Eurozone session, we get Spanish Unemployment and German Ifo Business climate data. At 12.45 we get the ECB rate decision and policy statement ahead of the 1.30 Press conference.  At the same time, we get US Durable goods and trade balance.

Friday - It’s a quiet session in Europe with only German Import prices. The afternoon brings the core data of the week with the release of US GDP which is forecast to fall to 1.8% from 3.1%.