Duncan Donald

Mon, Jan 14

Weekly Markets Update - 14/01/2019

Last week saw the strong theme of positivity continue in global equity markets. This comes despite the continued, and now record-breaking government shutdown in the US over President Donald Trump’s Mexico border wall.  In the wake of a fairly negative end to 2018 and despite concerns over the shutdown, last week’s continued progress was driven by two significant factors; the US interests rate outlook and the US-China trade talks.

Following on from the Federal Reserve Chairman Jerome Powell’s speech earlier in January with a significant shift from interest rate rise optimism to a more cautionary stance, last week again brought a steady stream of Federal Reserve committee member comments, who continually reiterated these points as well alongside Powell himself. Despite continued strong data, underpinned by the December Employment report, fears over the pace of interest rate appreciation is now not just a concern for the President, but also for Powell’s Federal Reserve. 

The cautionary tone set by committee members Evans, Clarida, Bullard and Powell himself last week is wholly contrary to what we were hearing in the second half of 2018, when the Fed were guiding us to two more rate hikes in 2019.  The market was already discounting their optimism, based on the significant downturn in the stock market at the turn of the year. Naturally, heavy criticism by the President will be hard to ignore by committee members and whilst the economy is generally supportive of the path set in 2018, the past week they have most certainly signaled that they are prepared to take reflective time to watch markets before a continuation of the hiking cycle. Significantly, the Fed now seem to be retracting to the view of the markets, that we see no further interest rate progression in the first half of this year.

Surging interest rates were not the only concern for the equity markets, with the US-Sino Trade war being a notable concern to global growth in 2018.  The past week brought further significant progress in the trade dispute, with both sides speaking positively of the ongoing negotiations within this “truce” period. This was backed up by a surge in the soya bean market as China again placed significant orders from the US. The week also saw China cut their banking Reserve Requirements and alongside the trade deal progression, brought strength back to the Chinese Yuan, after a prolonged period of weakness. Whilst concerns over macro data remain, progress on the trade talks seems to be the most significant driver in the Chinese economy.

In the UK we are unquestionably facing potentially one of the most significant weeks since the Brexit vote of 2016. In the first week back of Parliament last week, Theresa May had the opportunity to increase support from MPs in her current Brexit draft. However, through statements from within her own party, the opposition and the press, it would most certainly appear that the current deal looks unlikely to pass on Tuesday, with as many as 70% of Parliament stating that they will vote against the deal in its current form.  With the act of departure from the European Union being an untrodden path, it was always going to be a complex process, but as we head into this pivotal week it does remain staggering that the potential pathways for the UK have not been narrowed to just a few eventualities. 

Over the weekend, Bloomberg ran a Brexit evaluation piece, based on surveys held with 11 major global banks. They cited 6 outcomes with varying possibilities, with the most probable, attributing a 50% chance of there being an extension of Article 50. This would buy the UK more time to get their house in order and create a mutually acceptable deal for all parties.  However, both the EU and PM May’s own spokespersons have commented this week that this would not happen, prompted by the Evening Standard newspaper running a story claiming an extension had been agreed.

It is believed there is as little as a 15% chance that the PM’s deal passes through parliament first time, with that being the case, after some Parliamentary procedural change pushed by Michael Gove last week, the PM could have 3 working days to amend and resubmit the deal for Parliamentary approval. Obviously, the question remains what changes and concessions could be made that would shift the vote positively. However, there is increased probability of success of a second vote seen at 35%.  There is of course the chance that the opposition could seize the opportunity of a parliamentary failure of the Brexit deal to call a General Election, but a Labour party led by Jeremy Corbyn and leading the UK through Brexit is not installing public confidence. 

There also remains a chance (Bloomberg siting 25%) that we see a second referendum. Perception is that this would lead to a reversal of the UK’s current Brexit path and would potentially offer the most positive outcome for the Pound, and could lead to a reversal of the 13% decline in its value since 2016. The last and growingly least likely eventuality is a No Deal, whereby the UK leave the EU with no trade deal reverting to WTO rules. This potentially damaging option for UK trade and industry seems to be diminishing in possibility (probability just 20%) as has been reflected in the Pound appreciation in the year-to-date.

So there seems no doubt that this will be a week of great volatility with many potential outcomes. It would be expected that the PM has a plan that is greater than what is currently apparent, so we expect to see a significant shift in the Pound starting on Tuesday, then in any subsequent developments.


The Week Ahead:

In the UK of course, Parliamentary vote’s on Tuesday 15th January and any subsequent developments will dictate all UK markets, but we also see UK inflation data for December on Wednesday. With the low price levels seen in oil over the last few months despite the slight rebound last week, we would expect this to still act as a dragging factor on inflation. Low inflation coupled with increased earnings in the UK will have been welcomed by households, and Friday the 18th January will be a good barometer of this when the UK Retail sales data is released, and we get a glimpse of how the retailers have performed in what is becoming a very price sensitive economy.

In the US, we enter earnings season and this week we hear from some of the biggest banks with Goldman Sachs, Citibank and Wells Fargo all reporting earnings. So naturally we will see volatility, but a good tranche of earnings could well give the turning stock market the impetus for the next stage in the recovery, now that the Federal Reserve has turned more cautionary. We are sure to see US Retail Sales data on Wednesday 16th January, similarly to the UK with strong earnings and employment becoming the norm in the US, expectation would be for a continuation of positive Retail Sales. However, the data could be postponed due to the Government shutdown.

In the Eurozone, we need to keep an eye on developments in Greece with Tsipras calling for a confidence vote which could lead to an early election in Greece. The Eurozone is not isolated from developments in Brexit and whilst highly unlikely, any major concessions from the EU could show vulnerabilities in the EU and open the door for further exits. Data wise, Thursday the 17th January brings Eurozone Inflation data expected inline at 1.9%.

Have a great week.