Duncan Donald

Mon, Nov 19

Weekly Markets Update - 19/11/2018

Last week’s market moves were dominated by Brexit with Theresa May finally creating a Brexit plan that was capable if gaining approval from her own cabinet. Whilst this should have been seen as meaningful progress in the larger picture of the negotiations, we ended the week with Prime Minister May under more pressure than at any stage during her tenure.

Whilst she managed to get the deal through her cabinet, the following day we heard a great deal of vocal disharmony when members of her Conservative party spoke out against, both her leadership and her ability to continue the EU divorce deal. Any slight positivity we saw with the cabinet agreement was far more aggressively unwound when the UK Brexit negotiator Dominic Raab resigned, stating that he could not continue in role to watch the UK get bullied by the eurozone against the wishes of the voting UK public. This took the pound nearly 3 cents lower in just a few hours as the markets continue to question whether we may see a UK leadership challenge which could not come at a worse time for both the PM and Brexit. 

As the EU review Theresa Mays deal whereby it is not a given, they will approve it, they will also have to question who will be around to lead the UK through it.  It is thought that 42 conservative party members have written to the 1922 committee, stating that they do not believe the Prime Minister is capable of running the party. If they trigger the crucial number of 48 letters, then we go to a parliamentary vote of no confidence. Should that situation arise, with the opposition naturally likely to vote against her, as well as the Scottish Nationalist Party and anti-Brexit members of her own party it could well be unlikely this is a vote that May could survive. Alternatively, if the vote of no confidence is not triggered and the EU do pass the UK’s proposal the PM remains reliant on those same parties to approve the Brexit deal in Parliament with optimism for a successful outcome being very low.

GBP/USD 15m Chart

Naturally the markets are taking a somewhat pessimistic view of the potential outcome here with the pound trading weak. The weaker pound is helping the FTSE 100 UK stock market as companies within benefit from external demand brought from the lower pound exchange rate. All eyes will be on the news out of Westminster where any additional resignations from the party of or letters of no confidence could topple the PM’s reign.

FTSE100 15m Chart

We did see the GBP/USD rate turn slightly more positive late Thursday and on Friday which was more driven by US Dollar weakness than Pound strength as we heard from members of the Federal Reserve. The FOMC meeting passed with no changes to the interest rate as was entirely expected, this in itself was no surprise to the markets. It is expected we do see the Federal Reserve resume their rate hiking cycle at the December, as they have been telling us, what surprised the market and brought about the move was the rate outlook for 2019. The Fed finally seemed to introduce caution regarding the global landscape alluding to caution which is something we haven’t been hearing from them and brought a downturn for the Dollar.

In the Eurozone we await the reaction from the European Commission over Italy’s failure to trim forecast spending in an attempt to cut the budget deficit to below the 2.4% forecasted. The decision is expected to come on Wednesday with the punishments for the breaching of these fiscal rules likely to be heavy fines. Naturally as this impasse persist between Italy and the EU Italian stocks and in particular Banking stocks have been trading very poorly.

Aside from the headline events in terms of the economic calendar this week is relatively light on data. We have the Thanksgiving Holidays in the US effecting Thursday and Friday this week as well as public holidays in Japan at the end of the week.  Australian Monetary Policy Committee meeting minutes and Japans Governor Kuroda are speaking on Tuesday. On Wednesday we have Durable Good Orders out of the US and Friday brings Canadian Inflation and Retail sales data.

Have a great week