Duncan Donald

Mon, Mar 25

KYLIN TALK | Weekly Markets Update 25.03.2019

As has been typical of this year as the Brexit deadline draws close, last week was a big week for the Prime Minister and the week ahead could be bigger. As speculated last week’s crucial 3rd meaningful vote on her current deal was pushed back.  With the definition of madness often defined as doing the same thing repeatedly and expecting a different result, and with no shift in the house to support Theresa May's deal she opted to push back the meaningful vote.  However, she did have to concede and make a formal to the EU for an extension of Article 50.

The extension will give the PM until April 12th to try and achieve parliamentary agreement. The reason for such a short extension is twofold, firstly with European Parliamentary elections coming up, should the UK still be in the EU at that time legally they would have to be represented as the people of the UK would require a voice in the European Council, naturally, the EU are keen to avoid a situation whereby the house will be formed only for members immediately depart. Secondly, Theresa May will likely require the “cliff edge” of a deadline day, to pressure MP’s, with the only two scenarios the PM is prepared to consider being her-deal or no-deal, her ideal will be that the fear of walking away from the EU with no recognizable trade deal in place will push the house to back her deal.

But what needs to be considered is whether she can in anyway bring support for her deal. In her address on Wednesday when it was announced she would request an extension of Article 50 she expressed embarrassment that MP’s had failed to reach agreement and caused such delay,  the tone and delivery made it feel like she believes blame lies outside her door, and with many of those who voted against the deal being heavily critical of the PM, this will naturally further anger not just them, but those who had previously supported her. In reality, the confidence in the PM is at an all time low with many calling for a no confidence vote, however having survived 2 of these in recent history, she legally cannot face another until the end of the year. Sources have claimed that senior MP’s within her own party have requested her resignation, believing new leadership is required to get a deal agreed. However, it seems she is determined to see this through, and with a drought, of Conservative Party candidates and it is believed that even if a General Election was forced, Jeremy Corbyn the head of the Labor party exudes little confidence he could achieve more given the opportunity if elected.

In the midst of the developments the pound continues to be one of the poorest performers in the G10 space in the year to date, whilst the extension of the negotiating period helped the pound the PM’s insistence of her deal or no deal brings the prospect of no agreement back into play, and this is potentially the most damaging for the pound and remains the reason why we have been unable to break back above the 1.3500 are in GBP/USD even despite a very heavy week for the US Dollar.

In the US the Federal Reserve Open Market Committee met on Wednesday, this much awaited event certainly gave clarity on their thoughts on rates as they further pushed back the likelihood of further interest rate hikes in 2019 with just 3 members forecasting that we see rate hikes in the latter stages of this year versus 11 earlier this year. Again, concerns surrounding a global and now a domestic economic slowdown was sighted as the need for a pause for consideration before resumption of a hiking cycle. Whilst the market has had time to get used to the shift in stance from the fed since the turn of the year this was an overextension of expectation and the initial reaction brought heavy selling in the US Dollar and US Stocks initially surged before swiftly turning negative as the battle between rates being lower for longer (good for stocks) and global concerns (bad for companies) ensued. USD/JPY fell from near 112 to 110.50 and EUR/USD surged from 1.1350 to below 1.1450 and as the Dollar bears stepped in.

Friday brought fresh volatility as the German PMI data brought the latest wave of concern for what seems to be an ailing economy for Germany. Following on from poor Manufacturing and Automotive data this Purchasing Managers Data gives worrying indications of a stall in typically buoyant economy. PMI data is regarded as a very good early warning signal of economies, as naturally when businesses are feeling an economic pinch, the first action is to cut spending (purchasing). The release which was the worst return since 2013 brought heavy selling to the Euro with EUR/USD falling from 1.1400 to below 1.1300. But news of this magnitude naturally had a greater impact on the markets namely risk assets. Being one of the prime risk currencies the Japanesse Yen saw an immediate flight to comfort and heavy buying so with Euro selling and Yen buying the most aggressive move came from EUR/JPY as it fell from 126.00 to below 124.00.  This further confirmation of an economic downturn weighed heavy on stocks as all major indices suffered as the following doubts over the progress of trade negotiations and a weaker than expected release of PMI data out of the US with the S&P 500 finishing the week -0.75% and the Dow Jones -1.31%. Naturally it has been a heavy week for the stock markets, in what has been a buoyant year.


The Week Ahead

Monday - After the eventful week from the Federal Reserve (Fed)  last week attention will be paid to the Chicago Fed President Evans speech which coincides with the opening of the markets in Asia on Sunday night. Focus will then switch to the German IFO Business Climate conditions with a poor number likely to trigger further selling after Friday’s poor Purchasing Managers’ Index (PMI) data. There is another Fed member, Harker speaking midmorning. In the evening we have the Reserve Bank of Australia’s Ellis speaking ahead of Australia's Trade Balance data.

Tuesday - French GDP and UK Mortgage Approval data is first up. In the US Session we have US Housing Starts and Building Permit data before the Consumer Confidence, with fears of a turning economy only the Consumer Confidence number is forecast to exceed last months return with 132.0 forecast against last months 131.4.

Wednesday - It will be an active Asian Session with the New Zealand Central Bank’s Interest Rate decision early on. Expectation is that it remains at 1.75% but naturally the statement following the decision will add direction, with the turn of focus from hiking to potential lowering seen in Australia. In addition to comments from the Fed in the US and evident slowdown in Europe, we could see a cautionary tone from the RBNZ. Early in the European session we hear from Mario Draghi in his first statement following last weeks poor PMI data. In the afternoon we get US Trade balance, Import and Export Data and in the evening we hear from Fed member George

Thursday -  UK Nationwide Housing data comes early in the session. In the afternoon we have US GDP data for Q4 which is forecast to be 2.5% down from 2.6% from the previous quarter. We also hear from the Fed’s Clarida.

Friday - Is a busy day of data with German Retail Sales and Unemployment data both forecast to show month on month declines. UK GDP at 9.30 is forecast consistent with the last quarter and year.  Italian CPI comes late morning and in the afternoon session we get US PCE Price Index and Deflator as well as Personal Income and Spending data.