Duncan Donald

Mon, Apr 1

KYLIN TALK | Weekly Markets Update - 01.04.2019

Inevitably, the Brexit situation continued to dominate the headlines this week as the EU’s hard deadline came and went. Naturally by this juncture, you would expect some progress to have been made.  However, the UK remains in a confused and frustrated status with their elected Parliament and in particular the Prime Minister Theresa May. In a week that saw the PM persist with her twice unsuccessful withdrawal agreement in an unchanged form, it remains unsurprising that there was a reluctance among the House of Commons to endorse Parliamentary agreement.

The Prime Minister's hope that forcing the potential cliff edge of the UK leaving the UK with no trade agreement would force MP’s to back her deal.  But, in a series of votes they again kicked back against her deal as the UK rolled the dice on the fate of the departure from the EU. With the markets having always been optimistic that the UK could find agreement, ensuring a departure with a credible plan. Such optimism meant that up until the last day of the first quarter of 2019,  the probability of an agreeable deal was supporting the Pound so much so that it was the top performing G7 currency. However, Friday's 3rd rejection of Theresa May’s deal and the general disharmony in the UK weighed on the currency, as the door is starting to open to the potential of the “worst case scenario” no-deal that the market feared. This took the pound down 1.3% versus the US Dollar on the week, with surging oil prices permitting the Canadian Dollar to end the quarter as the strongest performer.

So, the key question is what next for Brexit?  In a week that saw the PM offer to resign if her deal was accepted by Parliament, there was a loose expectation that she could have exited her role after her third failure in gaining the required support on Friday. Seldomly do you see a leader, committing to persist only in the face of failure. However, persist she will, meaning this week we expect further votes on potential amends to her Brexit deal, likely inclusive of a customs union as the tries to avoid no deal or a second referendum. Indicative votes expected on Monday will likely give us an indication of potential success of these last-minute amends.  

From a market perspective we are already seeing mismanagement weighing on the UK and a no-deal Brexit is perceived to take the pound back to the 1.1500-1.2000 area against the US Dollar. Parliament finding agreement is expected to take the pound back to the 1.3500-1.4000 area. A second referendum could potentially lead to a disharmony dip, before a move higher as at this juncture, it is expected a public vote could lead to Article 50 being revoked, leaving the UK within the European Union. As always in recent times, there is a huge week ahead for the UK and with that will come market volatility.

In the US, as President Trump survived immediate backlash in the Muller report, the US markets and the Dollar had a strong week against its counterparts.  In a week that saw a raft of Federal Reserve Open Market Committee (FOMC) members speak at events the theme that we received from them was that of caution over the global economic outlook. Perception in the markets suggest that in this quarter we have shifted in expectation of FOMC interest rate hikes to cuts. Whilst there remain serious objectors to that fact within the markets, such a shift in sentiment is very surprising. This pause in interest rate tightening has permitted the US stock market to flourish, enjoying the potential of a low interest rate environment and pushing the S&P towards its strongest first quarter of this century. Of course, it is not just the interest rate outlook that has assisted the S&P, the positive sentiment being expressed by parties in the trade war negotiations have certainly assisted.

This week brings key US employment data. Last months was a staggering disappointment, but is understood that this could have been due to the implications of the US Government shutdown over the turn of the year. Whilst average earnings remain high, potentially buoyed by lower unemployment forcing businesses to hike wages to recruit at higher remuneration to stimulate the workforce, this week’s Non-farm Payrolls data, Retail Sales, Durable Goods and ISM data should give us a good gauge economic health, and if as foreseen by the FOMC, global concerns are weighing on the US Economy.

In the Eurozone further concerns of the exposure of bloc members to Turkey has brought enhanced concerns to their collective economies. The week brings the release of the minutes of the last European Central Bank meeting minutes and particular focus will be on whether any discussion took place regarding the resumption on their quantitative easing program or QE2 should the current downturn persist.  With Germany very much under the spotlight in their manufacturing sector, with the automotive sector in particular showing signs of stress, this weeks Industrial Production data will be key.

The Week Ahead

Monday - 
* Unemployment and Flash Inflation estimate in the Eurozone
* US Retail Sales
* US ISM Manufacturing

Tuesday - 
* Australian Interest Rate Decision (Consensus Unchanged)
* Industrial Producer Prices in the Eurozone
* UK Manufacturing Sector Performance
* US Durable Goods

Wednesday - 
* Australian Retail Sales
* Retail Trade in the Eurozone
* UK Services PMI
* US ADP Employment Data
* US Non-Manufacturing Data

Thursday - 
* Q1 Sectoral Accounts: Business and Households in the Eurozone
* Industrial Import Prices February 2019 update in the Eurozone
* German Factory Orders
* ECB Interest Rate meeting Minutes

Friday - 
* Q4 2018 Balance of Payments update in the Eurozone
* UK Productivity October to December 2018 update
* German Industrial Production
* US Non-Farm Payrolls, Unemployment and Average Earnings
* Canadian Employment data