INSIGHTS

Duncan Donald

Mon, Jun 10


KYLIN TALK | Weekly Markets Update 10.06.19


As Theresa May resigned from her position of UK Prime Minister the leadership contest begins in earnest. With the pound having struggled throughout the Brexit debacle it seems likely that their will be no respite during the quest to narrow the field of candidates down and ultimately elect a new leader.

 

Last week Donald Trump visited the UK, a visit that was broadly unpopular with the UK public, he threw his support behind Boris Johnson, who currently appears to be emerging as the favourite for the post in the populist polls. Trump's attempt to appease the UK with the offer of an amazing trade deal between the two countries post EU departure sounded positive on the face of it, but under the surface it raises questions regarding the protection of the UK’s free National Health Service.

 

 

From an economic perspective as expected we are starting to see a slump in UK manufacturing, the numbers from earlier in the year were buoyed by stockpiling of goods ahead of the now extended Brexit deadline, meaning that now, post extension we are getting a true feel of demand and the health of UK factories. Leading car manufacturer Ford elected to halt production in their plant in Wales, putting over 2000 workers out of employment. They claim the shutdown was not related to Brexit, despite warning that Brexit could lead to plant closures over a year ago. Naturally, with Nissan and Ford now having chosen to relocate production there are real concerns over this prolonged and disorganised Brexit, as it starts to damage UK employment.

 

In the US the US/China trade negotiations took a backseat as the markets focussed on the US/Mexico negotiations. Throughout the week Mexican Peso traded heavily as the Mexican and US negotiators sought to draft a deal. With concerns over the US automotive industry also holding a significant impact, as 25% of US cars being manufactured in Mexico, their was perhaps more urgency for a deal for the US than Trump alluded to in his strongarming statements and tweets. However, it was announced on Saturday that a deal had been reached which should naturally bring positivity to the US Dollar and the stock market as we start the week.

 

 

From a monetary policy perspective it was a significant week, with the Federal Reserve's Bullard, Evans and Chairman Jerome Powell all speaking. The general tone was that the committee will be prepared to act in cutting interest rates should the global economic climate slow. With many believing the current climate already warrants action, and its felt the haste of the Fed to hike rates around the turn of the year was too aggressive, warranting an immediate cut in rates. Post, comments from the committee members forecasters from major financial institutions were pricing in a probability of a cut in rates from the US by year end at over 90% probability, with the chance of a cut as soon as July at over 50%.

 

The key datapoint last week was the release of US employment data last Friday. Having already seen a rather poor number from ADP employment earlier in the week, the markets was viewing the previously forecasted number of 180K Non farm new jobs created as optimistic. However the drop to 75k certainly shocked the markets and hurt the US dollar. Not even a marginal rise of 0.2% in Average Earnings and the fact there was no increase in Unemployment helped the Dollar, as pressures grow on the Fed to react to softening data hampered by trade tensions.

 

Troubled by political uncertainty in Italy, Greece and even Germany, and with the pressures of the potential eventualities of Brexit the European Central Bank (ECB) met this week to discuss monetary policy in an economy under pressure. With rates already at historically low levels expectation was building for announcement of additional Quantitative Easing (QE) or even a further rate cut. Whilst we came into the year expecting rate progression, the fact that Mario Draghi pushed back rate hike expectations to 2020, typically would have had led to buoyancy in the Euro. Whilst that was immediately apparent, the weight of the market came back on the Euro, and whilst it finished the week higher against the dollar this can be more attributed to the post payroll US Dollar weakness.

 

Significant economic releases in the week ahead:

 

Monday:

  •       GDP monthly estimate, UK: April 2019
  •       Construction output in Great Britain: April 2019 and new orders January to March 2019
  •       UK trade: April 2019

Tuesday:

  •       Labour market economic commentary: June 2019
  •       Public sector employment, UK: March 2019
  •       UK labour market statistics: June 2019

 

Thursday:

  •    Industrial production April 2019 – Eurozone
  •       Interest rates (3 months) May 2019 – Eurozone
  •       Long term government bond yield May 2019 – Eurozone
  •       UK trade in goods by classification of product by activity: Quarter 1 2019

 


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