Duncan Donald

Mon, Jul 29

KYLIN TALK | Weekly Markets Update 29.07.19

It came as no surprise to the markets on Tuesday that Boris Johnson was victorious in the Conservative party leadership race. After being officially endorsed by the Queen, he now has to put every effort into delivering a Brexit Deal or no deal as he has so vehemently pushed throughout his campaign.

The initial announcement was met with a relatively muted reaction from the pound, it was only as details of Boris’s “war cabinet” was released that we started to see movement.

Initially, the appointment of Sajid Javid as Chancellor was seen as a positive one, with his pro-Brexit stance it is thought he could give Boris an accommodative budget to deliver Brexit.

Naturally, Boris was pushed on his Brexit stance throughout his first week in the new role, with him making it known that Brexit with a deal is his preference, but if the EU remain to stanch in their willingness to negotiate, he is prepared to take the nation out of the EU without a deal. Whilst over the weekend polls were showing that Conservative party populism had grown, showing growth to 2:1 over the Labor party under Boris and his new team, tensions in Northern Ireland and Scotland are significantly growing. The leader of the Scottish Nationalist Party Ian Blackford welcomed Boris to Parliament as “The last Leader of the United Kingdom” a threat that in Scotland and the SNP will push to follow their voting public, who unanimously voted in favour of remaining in the EU during the Brexit referendum. The last week has also brought increased talk of the reunification of Ireland bringing together Southern and Northern Ireland who will not stand for any form of a hard border between their countries, knowing the historic troubles it once brought and could bring again.



With Boris’s team now taking shape, this week should hopefully see them quick into action with holidays looming and the October deadline coming fast. On Thursday this week, we hear from the UK Monetary Policy Committee, who will again stand firm leaving interest rates at 0.75%, with Mark Carney and team unable to commit to action due to the uncertainty of Brexit.

In the US we will likely see a shift in interest rates this week. After continued pressure from President Donald Trump the Federal Reserve Open Market Committee (FOMC) will cut interest rates on Wednesday night, with the big question being, by how much. With US stocks coming through earnings season well, and the almost known shift to a lower interest rate environment stocks are enjoying a buoyant period at historic highs which Trump is taking as a personal achievement.

However, the strength of the US Dollar is becoming problematic for US trade, and whist a rate cut should soften the surging Dollar, this may not turn out to be the case on Wednesday.

If we go back 2 weeks, we heard from FOMC member Williams, that he thought a 50-bps cut would be required, this got the market excited. But in an unusual step, the New York Fed took the step of updating the market that this was Mr Williams’ future view and not specific to this meeting.

With other FED members also stating that 25-bps would be adequate as a first action and with the subtle cut factored in already, would it really have the desired effect of curtailing the strength of the US Dollar? A softer cut would likely bring further pressure on the committee from President Trump, who has vocalized his unhappiness with their actions in the past, especially if key manufacturing data and employment data on Thursday and Friday respectively show weakness.


From a trade negotiation perspective, things do seem to be progressing well, with two high level US negotiators heading to China this week for face to face discussions on progression. The US/EU trade deal seems to be getting more coverage, with Trump hinting over the weekend he could increase tariffs on European wine imports to the US.

It was also a busy week for the European Central Bank as Mario Draghi nears the end of his tenure. Due to the recent downturn seen in the Eurozone, it is becoming increasingly likely the ECB has to take steps to boost the economy.

Whilst it was widely expected that last weeks meeting would not likely bring any significant change to the policy, the full focus was on the guidance given for the future meetings. Whilst the outcome was broadly in line with the expectation there was disagreement within the committee which led to typical gyration of the Euro rate as it surged to 1.1200 and back to 1.1100 versus the US Dollar.

The broad takeaway from the meeting is that we expect to see a cut in the September meeting perhaps even up to 50-bps and quantitative easing cannot be ruled out. The week ahead brings us Eurozone GDP which is expected to show a continued slowdown.


The Week Ahead

Monday - A very quiet start to the week with just UK Money Supply, Mortgage Approvals and Net Lending in the morning and no notable data in the US session.

Tuesday - The bank of Japan Outlook Report and Monetary Policy Statement comes first thing on Tuesday am with interest rates expected to stay at -0.10%. In the US session, we get US Personal and PCE price index as well as Consumer Confidence data.

Wednesday - A busy start in the Australasian session with Chinese manufacturing and non-manufacturing PMI data before New Zealand Business Confidence and Australian CPI.

In the European session, we get a host of CPI data from the Eurozone collective and countries as well as Spanish GDP.
The US Session starts with US ADP employment data before Chicago PMI’s. In the evening it is the FOMC rate decision and statement with rates widely expected to be cut from 2.5% to 2.25%.


Thursday - Chinese Caixin Manufacturing PMI is first up before Spanish, French, Italian, German and UK PMI data.

At Midday the Bank of England is expected to leave rates unchanged at 0.75% with Mark Carney delivering a statement shortly afterwards. In the US session, we get ISM Manufacturing data from the states.

Friday - The day starts with Australian Retail Sales. The main event comes at 1.30pm with US Non-farm Payrolls (forecast 160k v’s 224k), US Unemployment (forecast 3.7% inline with 3.7% last month) and Average Earnings ( forecast 0.2% in line with last months 0.2%)
In the late afternoon, we also get the University of Michigan Consumer Sentiment and Inflation Expectations.