Duncan Donald

Mon, Feb 11

KYLIN TALK | Weekly Markets Update 11.02.2019

Last week started with a positive tone for risk-based assets and saw equities moving higher.  The latter part of the week was characterised by increased volatility, generated by news that  acted as fuel to the fears of a global slowdown.

On Wednesday 6th, the market was expecting the Reserve Bank of Australia (RBA) to have a balanced stance. The RBA Governor, Phillip Lowe, surprised the markets in his post-decision statement by not only talking about rate hikes, but perhaps weighing up the benefits that could be sought from a rate cut. Whilst the pause in interest rates was expected, mention of cuts caught the markets by surprise and the first casualty was the Australian currency which immediately lost more than 1% in value against the US Dollar. Lowe highlighted the global trade war, the rise of global populism, Britain’s complicated exit from the European Union and political headwinds in the United States among downside risks for the RBA’s outlook. Reflecting those concerns, the interest rate futures market was pointing towards an increase probability of a rate cut by the end of 2019, with a 25 basis points cut seen by mid-2020. We also saw the India Central Bank unexpectedly cut the repurchase rate by 25 bp to 6.25%.

On Thursday 7th, the European Commission cut the 2019 growth outlook for the region from 1.9% to 1.3%. The worst downward revision coming for Italy, where the forecast dropped from 1.2% to 0.2%, the worst seen in the unified bloc to date. Naturally this generated a sharp spike in Italian bond yield. Italy has already recorded one quarter of contraction, which might imply that the Italian economy could move into a technical recession if another quarter of contraction is recorded.

On the commodities side, OPEC proposed a formal Oil production alliance with Russia in order to counterbalance the dominance of US Oil production at a global level. If this agreement materialises, the deeper production cuts could be the catalyst for higher oil prices.

In the US on Thursday 7th, we saw a reversal of the positivity of trade negotiations, which came after a remark from the National Economic Council Director, Larry Kudlow, who told Fox News that negotiations with China are still far away from completing. Considering that March 1 st is the end of the truce period, financial markets proved wary of a stall and equity markets reacted negatively. This week, the headline trade talks will resume, with a focus on the contentious issue of intellectual property rights.

Last week’s key economic readings still indicated strong domestic demand. The U.S. service sector activity, indicated solid expansion, however, not at the record pace seen in previous months. U.S November factory orders did see an unexpected fall. The focus this week in the US will be on avoiding another partial Government shutdown, with a deadline for Friday 15th.

In the UK, a second vote on Prime Minister Theresa May’s Brexit deal looks to be scheduled for 25th February, and we are finally seeing the Labour party providing conditional support behind the current proposal, providing agreement of 5 key legally binding conditions: a permanent and comprehensive UK wide custom union, a close alignment with the single market, agreement on future security arrangements and commitments on UK participation in EU agencies and funding programmes. Meanwhile, the EU agreed to resume Brexit talks in an effort to break the long standing political deadlock. However, EU leaders have again rejected Prime Minister Theresa May’s request to reopen the previously completed withdrawal agreement.  Alongside the unknowns of Brexit, UK Interest rates remained on hold last week, as expected as The Bank of England (BoE) left UK interest rates unchanged. With concerns of the unknown prevailing, they also elected to cut UK growth expectations to 1.2% for the year from 1.7%.  Coupled with the impending deadlines for Brexit negotiations and lower growth forecast, the Pound traded heavier on the week, finishing the week nearly a cent lower with GBP/USD at 1.2936.


The Week Ahead

Monday - Market will pay attention to the UK Q4 of 2018 GDP reading, which is expected to show a 0.2% expansion. We also see the UK Manufacturing Production numbers and receive German and Eurozone ZEW data.

Tuesday - US “Jolts” opening December job data is expected to come in at around 7 million new jobs. After last month, where the data showed a 0.14 Million miss of the number expected, the markets will need to see a strong pullback or at least stabilisation. Late in the session we also have the Reserve Bank of New Zealand interest rate decision, where no change is expected. But after the RBA opened the door to potential cuts, there will be great interest in the RBNZ’s thoughts for their rate outlook and inflation expectations.

Wednesday - Inflation readings in the US and UK. For the US. a 0.2% increase is expected. In the afternoon session we will also receive the weekly Oil Data.

Thursday - The most important data will be Germany’s Q4 GDP that is expected to show a modest 0.1% expansion. We will also receive the Eurozone GDP data.

Friday - In the UK, Retail Sales numbers are expected to recover from the -0.9% last month to 0.2% for January. Eurozone trade balance is also forecast to bring a slightly more positive return. In the US session we see key University of Michigan consumer sentiment and inflation data.