INSIGHTS

Duncan Donald

Mon, Sep 9


The British pound surges as Boris Johnson comes under political pressure

As the markets normalize after the summer break the two key topics persist, with Brexit and Global trade negotiations dominating.  In Brexit news last week brought a significant, if not disastrous week for newly appointed UK Prime Minister Boris Johnson. Having pursued the hard-line approach of pushing the ECB to believe that the UK is prepared to exit the European Union without any trade deals in place, thus attempting to force the EU to give concessions over the hard border between Northern and Southern Ireland. PM Johnson, of course, ran the risk of having his rather obvious bluff called. Last week in a series of votes the UK Government took the opportunity to show the PM that this was not a plan they could support.

 

With Boris having held only the slimmest of majorities it was always going to be close but had his own party supported his plans it would have had the weight to carry. However, a number of his party members and colleagues believed his plan held too great a risk and believed the sacrifice of their own seat and membership of the party, was worthy to block the possibility of a no-deal Brexit.  A vote was also cast to force the PM to seek an extension from the EU to accommodate an election, thus giving the people of the UK a chance to have their say again. 

 

 

There was much speculation over the weekend regarding whether Boris will actually request this extension. His desire is for a quick election, then focus on the October the 31st deadline, but this will be met with rebuke from the opposition who do not want a fast election and will demand Johnson fulfils his legal duty and request an extension in his scheduled for the 17-18th October. 

 

Over the weekend it was announced that Amber Rudd the UK Secretary of State for Work and Pensions chose to resign from the Conservative Party, stating there was no evidence that Boris holds desire for meaningful negotiation with the EU and was focused on hard Brexit, she also expressed sorrow that good party members had been expelled from party for having the strength to question the PM and his Brexit plan.

 

It will be another busy week as today Johnson heads to Ireland today, with the Irish PM Varadkar stating he wasn’t expectant of a big breakthrough in the talks. As the UK’s Parliaments calamitous behaviours continue, the Pound finally was brought some comfort last week. Following a brief spell below the multi-year low of 1.2000 against the Dollar, the momentum finally shifted to the upside as last weeks votes went against the PM and hard Brexit finally stated to become slightly less of a possibility, showing that even in the face of a recession, the market feels the UK will be better in the European Union.

 

It was a relatively quiet week in the trade talks between the US and China, with even Donald Trump reigning in the number of ” tweets”. Considering the cooling period in the negotiations we saw stocks as a significant climber with the S&P 500, Dow Jones fast approaching new highs and safe haves such as Gold saw dramatic downturns as portfolios rebalanced investment.

 

September will be a big month for the markets from a Central Bank perspective with a great deal of pressure sitting on Mario Draghi of the European Central Bank and Jerome Powell of the Federal Reserve. This week we do hear from the ECB with great expectation sitting on outgoing leader Mario Draghi for action to support the markets within the bloc. Whilst bonds have been enjoying gains across the globe due to trade conflicts Eurozone Bonds have significantly appreciated as the expectation is that Thursday will see Draghi kick off a fresh round of bond-buying via Quantitative easing. The risk danger of the meeting will be should we see no Action on either QE or slight cut to the interest rate, this would be the most significant surprise from the ECB this week. 

 

In the US the disastrous ISM Manufacturing number will give Jerome Powells Federal Reserve cause for thought on the next steps for Fed policy. However the Employment numbers at the end of the week showed things weren't too bad in the US as even at almost full employment, they continue to create 150k new jobs a month, a fact President Trump was quick to champion. This week data out of the Retail sector on Friday and Inflation data on Thursday will give us a good indication on the progress of the US economy. 

 

The Week Ahead

Monday -  Started with a slightly lower Chinese Trade Balance number and lower Japanese Bank Lending and Current account numbers. From the UK there was a surprise beat in the headline GDP and Manufacturing Production numbers as well as a decent return on Construction numbers.

 

Tuesday - Starts with Australian business confidence before Chinese CPI and PPI year on year data. We ger French and Italian Industrial Production early before UK Average Earnings data before again a relatively quiet US session.

 

Wednesday -  Australian Consumer Sentiment data from Westpac comes early in the Asian session. With little notable data in the Eurozone Session, the next meaningful data comes with US Core and No-core PPI before Crude Oil Inventories at 3.30.

 

Thursday -  German and French CPI and Italian Unemployment comes in the Eurozone session. Just after midday we ger the ECB’s rate decision and Statement where the market expects meaningful action from Mario Draghi. At 1.30pm its US Inflation data.

 

Friday - Eurozone Trade balance comes early in the session. In the US session, we get a glimpse of the US Retail sector where Retail Sales are expected to come in at 0.2% versus the 0.7% seen last month, with Core Retail sales down to 0.1% from 1% last month.  At 3pm we get University of Michigan Consumer Sentiment.

 


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