Duncan Donald

Mon, Sep 24

Weekly Markets Update - 24/09/2018

We come to the end of what has been a very busy month, with little to indicate this could change anytime soon. As has been familiar, Trade War and Brexit have been the dominating the global economy.

In the UK, as we suspected, the optimism that markets have been giving Brexit negotiations over the past few weeks was proven unfounded, as things hit a solid stalemate at the end of last week. We saw the largest single-day drop in the pound (almost 2%) as the UK and the EU hit an “Impasse” over the Irish border issue at the Salzburg meeting, with the EU rejecting PM May’s Chequers proposal. Whilst all significant members of the EU negotiating team spoke out against May’s plan, including Chief negotiator Barnier, Junker and Macron, it was Donald Tusk that riled the PM with his Instagram post claiming the UK wished to “have its cake and eat it”.  The PM responded aggressively, requesting the EU act progressively, offering solutions rather than just flatly rejecting proposals. May admitted that we remain a long way off an agreeable solution, and that we must be prepared for a hard Brexit. Naturally this hit the pound hard and the unfounded optimism was wiped off, with it crashing from 1.3300 to 1.3050.

With the October deadline for proposal submission and no plan A, or B for that matter, evident from the government, all eyes will be on the PM to attempt to turn this round, and quickly.  The Labour party have their annual conference this week, with Brexit and a potential second referendum top of the agenda. May will have to be well prepared ahead of her own Conservative party conference next week, with plenty of internal issues regarding her own party’s belief in her ability ongoing, as well as discussions over a November snap-election.  Therefore, markets will be very sensitive to anything from the PM’s office, Brussels or the Labour conference this week.

In the US we have a big week, with the Federal Reserve delivering their interest rate decision on Wednesday. The decision itself is unlikely to surprise anyone, with markets unanimously pricing in a hike of Fed Funds from 2% to 2.25% - with the rate overtaking the inflation rate for the first time since 2008. What is proving interesting is the decoupling of the dollar and the interest rate, with us almost being on the eve of a hike with the currency finally starting to show signs of weakness after a pullback of over 1% against most majors. So, we focus on the statements from the Federal Reserve for any hint on future rate path, Trade War concerns, as well as any response to Trump’s criticism of the progressive rate hikes.

With Asia on holiday early this week, we opened with risk aversion over Trade WAR, we saw both the Australian Dollar and JPY gap at the market open. This comes after China cancelled talks with the US and alluded to the fact they will not be prepared to talk until after the midterm elections.  When arranged, these scheduled meetings seemed progressive, but Trump followed up with an additional round of tariffs, so all positivity was lost and naturally China are reluctant to deal in this manner. Particularly as Trump’s aggression persists, with the second tranche of tariffs going live today and Trump claiming he “will have no choice” on whether to follow through on his threat of a third tranche of $267 Billion.

In Turkey, the delivery of a strong economic report from the Treasury and Finance Minister Albayrak detailing the plan to deal with the ailing Lira brought some comfort to the market. Following on from the strong monetary policy stance we saw from the Central Bank, there is a little more belief that Turkey will be capable of managing this situation. There are also reports that US Pastor Andrew Brunson has a trial date of 12th October where his release could greatly ease their trade dispute with the US.

In the week ahead, we have the interest rate decision from the Federal Reserve on Wednesday and later that same evening we also hear from the New Zealand Central Bank, where no change is expected.  Then GDP comes into focus at the end of the week, with the US numbers expected to remain unchanged at 4.2% (QoQ) on Thursday, then on Friday we have the UK numbers at 09:30 (BST), again forecast to be unchanged at 0.4% (QoQ), then follows the Canadian GDP in the afternoon.  Naturally, we continue to expect the main market drivers to be Brexit, political uncertainty/disputes and Trade war headlines.

Have a great week

Duncan Donald

Director of Asset Management