Duncan Donald

Mon, Feb 18

KYLIN TALK | Weekly Markets Update 18.02.2019

In the UK, it was another tough week for the Prime Minister Theresa May. Following perceived success of the last House of Commons vote on Brexit amendments where there was a distinct feeling of the House perhaps showing support of the PM last Thursday, they again went to vote. Perhaps with the lack of progress made between Mrs. May and the European Commission over the time period the strain is starting to show, and the PM suffered another worrying defeat bringing back the fears that Parliament may take back control of the Brexit negotiations. However, this vote was over non-binding amendments so can perhaps be more indicative of a populism vote.

With the March 29th deadline looming and the PM only seeming to have the one obvious card up her sleeve in a threat on “No-Deal” which naturally sits in neither the UK or EU’s interest, the markets still seem to be assuming that the likely outcomes to this saga are “soft deal” or “lengthy Brexit extension”. Whilst neither of which offer those original Brexit voters their wish, they would certainly offer the best outcome for UK trade Industry in the short-term.

The Brexit optimism reflected in the Pound since the start of the year is starting to wane, and the Economic Data seen out of the UK is adding fuel to the fire. The growth outlook for the UK is slipping unaided by the handcuffs of the unknown caused by Brexit. We also saw the UK inflation figure fall from 2.1% in December to 1.8% in January and with the Bank of England’s hands tied until we see a Brexit resolution, Mark Carney will have a hard job steering back to the 2% target without active stimulus. The only UK related positive for the week was a strong showing for UK Retail Sales as the headline number came in at 1% a vast improvement on last month’s -0.7% brining the GBP/USD rate back from the weekly lows below 1.2800 to close near 1.2900.

As US earning season draws to a close, the message remains fairly constant with just a few exceptions the theme remains, things are good now but there are concerns going forward. This falls in line with what we have heard over the last few weeks from the UK and Eurozone and now we are starting to hear it from the US. From a monetary policy perspective, the Federal Reserve having paused for thought on their rate hiking cycle as warning of a potential global slowdown. Late in the US session we heard from the FED’s Bostic who whilst attempting to stave of fears of the US economy slowing down did hint that we could just see one hike per year in 2019 and 2020, down from the 2 that were expected in 2019 at the start of the year. Midweek we will receive the minutes of the last Federal Reserve meeting where the game changing shift to a dovish (cautionary) stance was delivered. So naturally the market will be looking to dissect the granular detail of the meeting.

Despite the evidence of a slowing global economy, last week proved to be a positive week in terms of global risk. The commentary of both sides on global trade discussions were particularly positive as we near the March 1st deadline, there was talk of potential agreement being reached prior to the deadline and failing that, a tariff free extension being granted. Trump also chose to avoid another Government shutdown keeping thousands of government workers in work. However, he did choose to elect a state of US emergency in order to push to achieve the wall that seems to be defining his campaign.  On the whole markets reacted positively this week with the Japanese Yen and Swiss franc falling back and USD/JPY probing above 111.00 again. Global stock also surged with the US Dow Jones, S&P 500 and even the UK FTSE all testing year highs.

Last week brought the Reserve Bank of New Zealand’s interest rate setting meeting and following the decision the Reserve Bank of Australia to open the door to the possibility of lower rates which surprised the markets, it was thought that we could see the RBNZ following suit. However, whist holding rates unchanged as expected they carefully omitted any indication that the next step on interest rates could be lower leading to a surge in the NZD/USD rate from 0.6725 to 0.6850.


The Week Ahead


Monday - With the US Markets closed for Presidents day the main event in the data calendar will be UK house price inflation from Rightmove released early in the morning.


Tuesday – The RBA release the minutes of the pivotal Monetary policy meeting early in the session. We then receive key UK employment data with the releases of Average Earnings (forecast 3.5% v’s 3.4% last month), Unemployment which is forecast to remain at the 4% level and Unemployment claims (forecast 12.3K v’s 20.8K). We also see economic sentiment data from Germany and the Eurozone.


Wednesday – Australian Wage data comes early in the session before at 7pm UK time we get the Federal Reserve Monetary policy meeting minutes.


Thursday – The key data comes from the Eurozone with the European Central Bank minutes mid-session after Private Sector Business activity earlier in the session. In the US session there will be releases of Durable goods, Existing Home Sales, Manufacturing activity.


Friday – We start the day with the German IFO data expected at 99.0 v’s 99.1 last month before Eurozone Inflation data which is forecast unchanged on last month’s data.  The afternoon brings a raft of Federal Reserve speakers at a US Monetary policy Forum in New York.