Duncan Donald

Tue, Aug 28

Weekly Market Update - 28/08/2018

Last week we finally saw the Turkish Lira removed from the main news headlines. This coincided with National Turkish holidays, with the Lira finding itself stuck between 6.00 and 6.30 for the week. Whilst the general downward trajectory may have stopped, it could well be that the markets are just pausing for breath. Most importantly, if we look at what has fundamentally changed, the answer remains very little. Their dispute with the US over Pastor Andrew Brunson’s release from a Turkish jail still unresolved, with threats of further trade sanctions still hanging in the balance.  Bearing this in mind I think we need watch the Turkish situation keenly this week, as it will unquestionably dictate the next move in the Emerging Markets.

In a real break to current trend we finally saw the US Dollar come under pressure and it can all be attributed to President Donald Trump himself. The first wave of selling came as Trump was implicated as breaking the law by Lawyer Michael Cohen, naturally President Trump denies these claim’s, but it was enough to give the markets cause for concern. 

President Trump also chose to attack his own Central bank and Jerome Powell and their active interest rate hiking cycle. In typical Trump style he championed everything he is doing from a global aspect to stimulate US business yet claimed his own monetary policy team were squeezing the life out of the economy with rate hikes.  As I discussed last week the financial progress in the states will of course at some point become harmful, it doesn’t take long before a strong currency goes from a source of pride, to and exporting nightmare.  But what we need to do here is split up the responsibilities, and the Fed have a job to do which should be very separate to politics. The federal reserve is briefed to work on facts and those facts are that US is performing well and interest rates are appropriate to date.

The motives for Trumps actions are unknown, it could be he is looking for a source to pass blame should the economy turn to the negative in the near future, or perhaps he was looking to use his own words and assumed internal disharmony to force the US dollar lower. This would constitute as verbal intervention an act he has spoken out against historically against Japan and China. Whilst the FX and commodity markets bought into it with the US Dollar depreciating across the board with the Euro, Gold and Oil being some of the main benefactors. The US Fixed income and Equity space didn’t buy into the move with evident preference being to take instruction from the Federal Reserve.  The S&P continued its bull surge hitting fresh highs at 2904.

On Friday at the Jackson Hole event in Wyoming, we did hear from Jerome Powell and he was unwavering in his guidance that they are on track for a 25bps hike in September despite Trumps words. Naturally he sighted concerns in the Emerging Markets and of course Trade War on all fronts when asked for further rate path guidance.

On the topic of trade war as predicted we saw little progress last week from the US and Chinese negotiating teams and despite $16 billion of tariffs on Chinese goods coming into play we still remain without progress. To use his own words Trump seems to like to concentrate on one thing at time and last week it seemed his focus was on solidifying a deal with Mexico which seems to have been achieved. Quite where this leaves Canada as the NAFTA seems to be becoming a thing of the past. Canada’s deadline for agreement is the end of the week, so expect further developments one way or another later this week.

In the UK it was a relatively quiet week with Brexit Secretary Dominic Raab delivering the first part of the governments Brexit Contingency report. There was little in the way of surprises in there and it dragged on the pound. On a more positive note data showed that UK public finances were performing well. 

In the week ahead expect politics to dominate as the market follows the headlines over Brexit negotiations and the United States trade negotiations with Mexico, Canada, China, Europe and Turkey.  Otherwise watch out for US GDP data on Wednesday which is expected to contract from 4.1% to 4%, and German Unemployment Data and UK borrowing figures which are both released on Thursday.