Duncan Donald

Tue, May 7

KYLIN TALK | Weekly Markets Update 07.05.19

In the UK another tough week ensued for Prime Minister Theresa May in a week that brought local elections across much of the nation. With the leading party the Conservatives losing over 1330 seats in England alone, as the public showed with their vote how dissatisfied they are with the leaders handling of the Brexit divorce. The prolonged disruption indecision and even the fact she hasn’t resigned her post remain the key frustration. However, it wasn’t just her Conservative party that suffered, naturally when their apparent dissatisfaction with current leadership, the expectation would be that the main opposition party would be the main benefactor. The results of the votes showed they too had lost 84 seats. The main benefactor from the votes of frustration were the Green party gaining 198 seats and The Liberal Democrat party with a large gain of 704 votes.  The Liberal democrats following had faded over recent years and they remain unlikely to reemerge as a potential winner should we see a general election, but their gain at these elections clearly underlies that the country is not happy with the majority parties in the House of Commons.

In a week that had seen the pound come under some heavy pressure touching lows of around 1.2900 against the USD the elections results brought little in the way of support. Thursday’s Bank of England Monetary Policy meeting, despite there being an optimistic tilt on the state of the economy, their remains the fact that until a tangible Brexit plan is formalized Mark Carney's committee remain paralyzed. The reaction to the fall in Conservative seats by Theresa May was somewhat baffling, she alluded to the fact the public were not happy with how Brexit was progressing, and that they should get on and deliver what the public wants, discounting the fact that the public were likely showing its was the act of Brexit itself, and the departure from the EU that was the source of dissatisfaction. Bringing scathing reaction from both her on party and the popular press. Labour leader Jeremy Corbyn came under pressure from his own party following his decision to enter into talks with the PM and the lack of support at the polls underlined the fact that populism is not sufficient to support a Labour win in a general election should he change tack and push for it. He took the step late on Friday afternoon to further emphasize the need to reach agreement on the withdrawal agreement with the PM a step that would perhaps make the best of both of the ailing leaders leaving their own party’s and a large segment of the population unhappy. Nevertheless, the pound sought solace from these words bringing the pound up to 1.3170 assisted by US Dollar weakness. Reports over the weekend from senior Conservative sources are alluding to a deal being in place in the next few days, but the markets are becoming tired of such promises so any rally at the UK open could be limited.

In the US, last Wednesdays Federal Reserve Open Market Committee Interest Rate setting council gave us their latest thought on US interest rates. President Trump of course, made his thoughts known ahead of the meeting claiming the FED were mismanaging their role and should cut rates by 1%. As expected, the FED chose to leave rates unchanged, but the fact that FED chair Jerome Powell was upbeat on the economy led to US Dollar strength and gave the surging stock market a pause for thought as Powell clearly signaled, he will not be pressured by the Whitehouse. However, these moves were overshadowed by Friday’s data and speakers.

First came US Non-farm payrolls, employment and Average earnings. Average earnings gained month on month bouncing back from 0.1% last month to 0.2% but failed to meet expectation of 0.3%. Positivity came with the strong beat of new jobs created at 263k versus expected 190k brining a slight rally to the Dollar. The rally didn’t last long and with a series of FOMC committee members scheduled to talk they brought a far more dovish tone to the future rate path for the US. Kudlow, Pence, Bullard and Evans all referenced poor inflation performance with Pence stating, “there is no inflation happening”, they all referenced the need to cut rates if the economy softens.  This added fuel to the fire for the markets with CNBC forecasts estimating a 67% chance of a rate cut by year end. Coupled with ths softer sentiment from FED members and the almost confirmationary fall in ISM data straight afterwards from the states the US Dollar ended the week falling hard as stock fell from the new highs created earlier in the week. We now look towards comments from Jerome Powell early next week to see if he is aligned with committee members.

The new week started as global stocks plunged following a tone shift from Donald Trump as we near crucial stages of the trade negotiations. With his customary tweets he signalled that the US will increase tariffs on $200 billion worth of Chinese goods. This aggressive step ahead of scheduled talks in Washington later this week caught the market unaware, with concerns that such strong measures could signal a breakdown in the talks that had appeared to be going well. On the open Asian stocks plunged at the fastest rate since 2016. Naturally, the market will await further confirmation or retaliatory actions from China. In the currency markets the emphasis was on buying “safe-haven“ currencies which saw the Japanese Yen and Swiss Franc appreciate.


The Week Ahead

Monday – With both the UK and Japan on Bank holidays the data in the morning session is predominantly Eurozone centric with PMI data from Spain, Italy, France and most importantly Germany as we look for a sign of a bounce back. IN the afternoon, there is no firm speakers but statements from the Bank of Canada’s Poloz and Federal Reserve’s Williams will be watched from a monetary policy perspective.

Tuesday – From Australia first up is Retail sales and Trader Balance, closely followed by their interest rate decision from the Reserve Bank of Australia where a 0.25% cut is forecast taking the cash rate to 1.25%.  Inflation data from New Zealand comes in the midst of the Australian data. In the European session we get German Factory orders, hear from UK Monetary Policy Committee member Cunliffe and get Economic Forecasts out of the EU. In the US FOMC member Quarles speaks around 5pm as well as UK MPC member Haldane.

Wednesday – Following on from the Australian Interest rate decision from New Zealand. It is forecast that they remain on hold at 1.75%. We also see Chines Trade balance data and German Industrial Production early in the session. At midday we receive the European Central Bank Interest Rate decision which is also expected to remain unchanged at historic lows, with all eyes on Leader Mario Draghi in his press conference for their forward outlook.

Thursday - UK RIC’s housing data starts the day before Chinese inflation data. In the US session we get the Canadian Trade Balance data as well as US PPI and non-core PPI. Jerome Powell makes his first public address since the FOMC meeting last week.

Friday - The day starts with the Reserve Bank of Australia Monetary Policy statement followed by some Eurozone Industrial Production data. In the UK we get a glimpse of the GDP data which is forecast to show a month on month fall from 0.2% to 0.0% with a rise in quarter on quarter numbers from 0.2% to 0.5%. At the same time we get Manufacturing production data where the forecast is for a fall from 0.9% to 0.1%. In the afternoon session we get Canadian employment data and US core and non core CPI as well as FED member Brainard speaking.