Duncan Donald

Mon, Mar 11

KYLIN TALK | Weekly Markets Update 11.03.2019

As highlighted in last weeks report, of the three Monetary Policy Committee meetings seen last week from Australia, Canada and the Eurozone, none elected to make any changes to base line interest rates. The move of the week did, however, come as a result of the European Central Banks meeting, where Mario Draghi followed up on the warnings of the headwinds facing the Eurozone in the form of trade negotiations and global geopolitics, by extending their forecast for historically low interest rates out to 2020, as well as offering a third wave of cheap loans to Eurozone banks via targeted Long-term refinancing operation (TLTRO). They also downgraded the forecast for GDP growth from 1.7% to 1.1%.

After the warnings from Draghi over global growth concerns heard over the last few weeks the market naturally expected a more cautionary or dovish tone from the ECB head in last Thursday’s meeting but what was delivered went beyond that and sent the Euro plummeting by nearly 1% versus the US Dollar and Japanese Yen. Naturally, the transfer from warnings to actions from the ECB firstly Eurozone then global stocks were hit hard taking the Dow Jones and the S&P 500 nearly 1% lower on the day.

Whilst Draghi seemed intent to lay the blame of the downturn of the fate of the Eurozone on external global factors, there are of course internal political concerns, an impending Eurozone election and of course Brexit. Whilst the EU continues to play hardball with the UK and naturally will remain to do so, it is prudent to consider the detrimental effect a “No-deal” Brexit could have on the EU. If we look at the results from the German Automotive Industry the effects of trade war are already showing, the loss or even slightly restricted access to the UK market could have serious implications.

In Brexit this will be a huge week for the UK. The buoyancy seen in the last week of February faded as the pound slid versus the dollar from 1.3300 down to push below the 1.3000 level.  Again, last week saw posturing from both sides of parliament, with little tangible substance. On Friday in a public speech Theresa May warned that if parliament fails to vote her deal through on Tuesday, we will enter an extension then “we could never leave”.  Whilst PM May was looking for one last push from the EU in her attempt to reach agreement again just a few hours later Michael Barnier, the EU Brexit negotiator underlined that there had been no progress in the negotiations, he noted the EU had proposed letting the UK exit the backstop with Northern Ireland remaining in, a deal which the UK would not accept.

Obviously, this week will be either pivotal or less likely, definitive in the Brexit Saga.  So, in a brief summary on Tuesday Mrs May will present her deal to parliament. If it passes, then the UK will exit the EU on March 29th. If her deal fails to gain the required majority, then on March the 13th parliament will vote on whether the UK should leave with no deal, again if this passes we are back to an exit on March 29th with no deal if it does not we move to a final vote on 14th March on whether there should be an extension of Article 50. This final vote will most likely be the most contentious, with market expectation being an extension, but of course in politics we can never be certain ensuring a week of volatility for the UK with the risks firmly stacked should the outcome be No-deal.

Despite the perceived progression on trade negotiations global equities traded heavy last week with significant levels breached in the S&P 500 and Dow Jones. The weight of the pessimism shown by Mario Draghi’s ECB, slowdown of German factory orders and the climax of Brexit weighing heavy. Last Friday we had the US employment numbers with the headline Non Farm Payroll showing an increase in jobs of just 20k versus the 180k forecast and near 300k lower than the previous months number. Whilst we can potentially attribute this to the disruption caused by the historic US Government shut down, it does still raise questions and affirms the cautious stance currently adopted by the Federal Reserve in active monetary policy stimulus. However on a slightly more positive note there was a marginal drop in the headline unemployment rate and increase in average earnings.


The Week Ahead

Monday - The week starts with Industrial Production and Trade Balance data from Germany.  US Retail sales comes in the afternoon where it is broadly expected to see the numbers return positive with headline figures expected at 0,6% up from the -1.7% seen last month.

Tuesday - Starts with Lending data out of Australia. UK Manufacturing and Industrial Production comes at 9.30. In the afternoon we see US Consumer Price Index. The all important UK Parliamentary Vote on the Prime Ministers current Brexit plan comes at 6pm with public announcement shortly after.

Wednesday - Eurozone Industrial comes midmorning in the European session. US Producer Price Index in the afternoon session. It is very likely we also see the secondary parliamentary vote Brexit later in the session.

Thursday - Chinese Retail Sales and Industrial Production come in the Asia session.UK Housing data from RICS is released pre UK opening.  German Index of Consumer prices is also release at the start of the European session.  Again, there is a fair probability of further Parliament Brexit votes on Brexit and the extension of article 50.

Friday - We hear from the Bank of Japan as they deliver their interest rate decision and whilst rates are unanimously expected to stay at -0.1% much will be made of the policy statement to gauge their perception of a potential slowdown in global growth. In the European session we get Final CPI data. In the afternoon session the main data will be Canadian Manufacturing Sales and University of Michigan Sentiment out of the US