Duncan Donald

Mon, Feb 4

KYLIN TALK | Weekly Markets Update 04.02.2019

The headlines last week were dominated by events Stateside. In the first week back since the lengthy Government shutdown it was a busy week in terms of data and reporting. The common theme across all data delivered very much underlined that things are good now, but there are concerns for the economy in the forward outlook. If we start with the Federal Reserve interest rate setting meeting delivered last Wednesday, where they opted to leave interest rates unchanged, the guidance delivered by Jerome Powell was very cautionary, citing concerns over global growth as the main factor. Powell cited that whilst data was looking good internally, the strength of the United States global trading partners economies would of course impact their ability to maintain economic growth.

Naturally, concerns over global trade negotiations, Brexit in the UK and a stalling outlook in the Eurozone would have been at the forefront on Powell’s thoughts in this statement, but Friday’s delivery of the unemployment rate gave a first signaling of concern for US data. Whilst on the face of it the key Payroll number was an incredible beat with over 320K new jobs created, hidden under that headline were some early signs of concerns. Firstly, a significant downside revision to last months number, a decrease in Average Earnings numbers, despite the evident supply of jobs and increase in Unemployment. However, the headline jump in job creation had both the stock market and US dollar buoyant, aided the fact the data seems to be shrugging off the impacts of the Government shutdown, it should be questioned as to whether the real impact will be reflected in next months numbers.  The earnings reports from some of the United states leading companies also remained buoyant, but many and most notably Amazon, whilst delivering strong numbers were very clear to underline provision for realistic expectations of delivery for 2019 due to global trade pressures. The Amazon projection of forthcoming slowdown brought stocks back to reality.

In the currency markets the EUR/USD tested the 1.1500 area peaking at 1.1514 after the Federal Reserve’s dovish (perceived negative) comments on Wednesday, before falling back with the strong headline payroll data on Friday. Mario Draghi the Head of the ECB continues to indicate concern over Eurozone growth so in isolation the Euro has traded heavily. The Japanese Yen has had more of a confused week. With its status as a “risk” currency it appreciates when the global economy suffers or is forecast downturns, so its no surprise the USD/JPY has been stuck in a stalemate situation as the USD benefits from short term data and the JPY bears the appreciation of those focusing on the long-term outlook. The currency pair remained in a 108.50-110.00 range for the week.

In the UK last week, Tuesday brought the Parliamentary vote on Brexit bill amendments and whilst it was lauded that the outcome was positive for PM Theresa May it must be noted that the vote was not actually legally binding. After much political haranguing, the consensus of the House of Commons fell behind the Prime Minister, with bills backing her desire to achieve amendments to the Irish backstop being passed. Whilst the fact this proves to the European Commission that the consensus of the UK parliament is behind the PM on the contentious Irish Border issue, the Pound showed vulnerabilities as Donald Tusk the President of the European Council immediately reiterated that there would be no further negation on this contentious issue. Concerns were also heightened by the failure to pass an amendment to extend the negotiation period for Brexit, MP’s voted against the extension, meaning we remain on course for the 29th March deadline for agreement or “No-Deal”.

Whilst the week saw a weaker Pound, with it pulling back to lows of 1.3045, we remain in positive territory for the year under the assumption that whilst the deadline is coming at the UK faster than it seems plausible to deal with currently, a last minute solution will be agreed with the EU. Over the last few days we are hearing of concessions made by the Prime Minister to obtain the backing of the opposition Labour party by committing to “serious work” on staying in the customs union. There were also reports in then weekend press that in attempt to halt any immediate challenge for her role, the PM will be prepared to call a June general election under the proviso that she is backed unilaterally by all parties to get a Brexit deal through with a possible extension of Article 50 to April to permit this. This all remains hearsay at this moment, so naturally the market will await and react to any clarification or dismissal in the week ahead.

The coming week will also bring significant data to Australia. This week brings the key interest rate decision from the Central Bank the Reserve Bank of Australia. We expect no change on benchmark interest rates and expect a progressive statement signaling the next move is likely to be higher, but any indication of the speed of delivery will naturally be the driver.  Key data in the form of Retail Sales, Services PMI and Trade Balance numbers could also give a strong indication of the strength of the Australian economy.


The Week Ahead

Monday – With China enjoying New Year Celebrations the Asia session will likely be quiet.  In the UK session we have Construction PMI forecast at 52.6 versus 52.8. Later in the day we receive US Factory Orders which are expected to come in at 0.3% up from the -2.1% seen last month.

Tuesday – A busy start to the day with key data out of Australia. It starts with Retail sales where a slight retraction to 0.0% from 0.4% is expected. Trade Balance is forecast to increase to 2.25 Bln from 1.93 Bln. We then get the Interest rate decision with the Cash Rate expected to remain unchanged at 1.5%.  The European session has a raft of services PMI data from France, Germany, Spain and the UK as well as Eurozone Retail sales. In the afternoon we have the US ISM Non – Manufacturing data.

Wednesday – A data light day on Wednesday with Australia’s RBA Governor Lowe speaking in the morning before German Factory orders early in the European Session. Crude Oil inventories come in the US session.

Thursday – Will be dominated by UK data when we receive the UK inflation Report at midday as well as the UK Monetary Policy Committee interest rate decision. UK monetary policy has taken a real back seat with the uncertainties of Brexit and whilst we expect no change in interest rates voted for unanimously by the committee the inflation data will surely bring volatility.

Friday – We start the day with Japanese Average earnings, expected to increase from 1.7% to 1.8%. This is followed by the Monetary policy statement from the RBA. The biggest data of the day comes in the US session with the Canadian employment/unemployment data.