Duncan Donald

Mon, Dec 17

Weekly Markets Update - 17/12/2018

Last week’s dominant geopolitical event was the vote of no confidence in the UK Prime Minister, Theresa May, as leader of the Conservative party, tabled by Conservative Members of Parliament. This was in reaction to the delay in the Parliamentary vote on PM May’s Brexit deal, which was delayed with the anticipation that the vote would be defeated. Theresa May successfully avoided being ousted as Tory Party leader, but the political damage has been significant. The Prime Minister returned to Europe to renegotiate her deal, but EU Members were not forthcoming with any potential concessions. Although the Pound did manage a brief relief rally, this was shallow and short-lived, with GBPUSD selling off back close to multi-month lows as of Friday, 14th December.

GBP/USD H4 Chart (November-December 2018)

The selloff in GBPUSD was primarily driven by US Dollar strength at the end of the week, with the US Dollar Index back close to 19-month highs. This has primary been a consequence of a shift to a “risk-off” environment over the past week, with global equity markets pushing lower in reaction to concerns regarding global slowdown. On Friday 14th December, weaker than anticipated Retails Sales and Industrial Production data from China, alongside weaker than expected Purchasing Managers Index data from France, Germany and the Eurozone highlighted a fading global economic recovery.  Equity markets suffered on Friday 14th December with US equity averages including the S&P 500 pushing back close to the lows from early December and not too far from yearly 2018 lows.  

S&P500 Daily Chart (Jan – Dec 2018)

Furthermore, US 10yr Note yields are hovering close to multi-month lows, whilst the Yield Curve inversion already seen in the 2-5year sector is threatening to push along the curve. The 2-10 year flattening has reached just 10bp, with concerns of an inversion in this sector being a forerunner to a US Recession into 2019-2020.

US Govt Bonds 02/03/05/10Yrs Yield Daily Chart (Jan – Dec 2018)

Now looking into the last full trading week of 2018, we have busy week ahead.  The future path for US interest rates is most certainly the most important on the macroeconomic cards this week. Over the last few months we have seen the tone of the Federal Reserve shift. Tt was full steam ahead and looking at 3 further interest rate hikes as we move into 2019 (much to the frustration of Donald Trump). But over the last 2 months and particularly from early December, the forward indications given to us by the Federal Reserve has softened, alluding to concerns that a global slowdown could slow the trajectory and pace of future interest rate rises.  In public appearances and statements from committee members, the shift in tone has indicated a more cautionary outlook from which the market has certainly reacted to. 

On Wednesday 19th December the FOMC will delivered their decision and statement, plus a press conference and there is growing anticipation of a formal declaration of a more dovish tone into 2019. Furthermore, the Bank of Japan and Bank of England will also give rate decision on Thursday. Although no changes are expected from these Central Banks, any forward guidance could be significant.

In addition to the Central Bank activity, the main data to note into this week will be the US GDP data on Friday 21st 

Have a great week.