Duncan Donald

Mon, Mar 18

KYLIN TALK | Weekly Markets Update 18.03.2019

The markets were dominated by events in the UK last week, as a series of key votes were held on the UK’s agreement and acceptance of Theresa May and the European Union’s Brexit deal.  Whilst the Prime Minister was optimistic that Parliament could pass the deal last week, crucial examination by Attorney General Geoffrey Cox immediately proved damning, and whilst Mr. Cox is a member of the Conservative Party, his professional analysis of mays last minute improvements to the deal was that the implied changes were just smoke and mirrors with little progress on the contentious Irish backstop. Despite continuous internal negotiations between the Prime Minister, the ERG and the Northern Irish DUP, when it came to the crucial vote, MP’s including many in the ruling party voted against the Prime Ministers deal.

This brought further votes on potential amendments, and most crucially a vote on the extension of the Brexit Process. Despite the fact there were few that didn’t see the ultimate result of the week playing out exactly as it unfolded, as the motion to extend Brexit inevitably passed.

However, it was the manner of which it occurred that was most damning for the Prime Minister. Despite the “three-line whip”, a motion that forces all party members to conform with the party line or face expulsion, she still struggled to achieve the desired outcome. In the House of Commons, the PM now cuts a lonely figure, a leader with more than one faction of opposition within her own party. Naturally this weakens her negotiation standpoint with the EU.

So, this week, we expect the PM to reach out to formally request an extension from the EU until the end of June. The EU has two key issues to consider prior to granting an extension. The first being the upcoming Eurozone leadership elections, should the UK be permitted to have a vote and potential influence when they are evidently departing. The second is what is the extension for, ultimately the UK still need to formulate a plan that CAN reach parliamentary agreement. The EU has made it quite clear that there will be no further amends from their side, so how will the PM bring her house and country to agreement.

It is expected that on Tuesday, Theresa May will take the chance on a 3rd meaningful vote on the current deal, it is thought Attorney General Cox is reviewing the draft and the hopes are that feedback could be more positive this time, potentially swaying MP’s. There will of course be deals cut in the House to sway votes but it is forecast that the deal could continue to be rebuked.  Despite the disarray in the Commons, the markets were relatively stable. Of course, short term trading the pound this week was difficult but in the bigger picture, there was little damage done. The markets remain more concerned over the UK crashing out of the EU with no form of deal in place, as that looked less likely last week the markets pushed up towards the 1.3400 high, before ending the week at 1.3300.

This week the crucial factors will be the response from the EU to the UK’s request of extension, additionally of course how any subsequent meaningful votes on the current Brexit deal incarnation. The week also brings the UK Monetary Policy Committee meeting, it is unanimously expected that we see no change in rates with a statement of caution ahead of Brexit finalization.  For now, Mark Carney's hands remain firmly tied.

Next week also brings the US Federal Reserve Open Market Committee (FOMC) meeting on Wednesday 20th March. With the FED having shifted in position of actively hiking towards the end of last year, to sighting concerns over external geopolitical and global growth concerns with Jerome Powell expressing that they are not in any hurry to hike this year.  A recent Reuters poll confirmed the financial markets now expect no movement from the FED until at least Q3 this year. The markets will await any significant indication on timing from Jerome Powell.  Talks of growth concerns will likely be in his speech, with even the strongest of economies Germany notably struggling with poor automotive numbers and 2 of its strongest banks Deutsche and Commerzbank announcing they may have to merge over the weekend press.

In isolation, the US economy does however remain strong.   The FED's action to halt rate rises and the positive developments in trade negotiation have fueled the stock markets and last week saw the S&P rise 2.7%.  The Dow Jones posted a solid week despite the significant fall of Boeing weighing on its performance following the global grounding of their 737 Max planes taking the stock nearly 11% lower on the week.  It was the technology sector that really drove the market up, predominantly chip makers. Facebook also had a poor week after a 3% fall following the departure of Chief Product Officer Chris Cox, their shares also struggled on Friday after the terrible scenes in New Zealand were streamed live via their platform.


The Week Ahead


Monday - With many Eurozone countries on holiday, the day is naturally light of data. The session starts with Japanese Trade Balance in the Asia session followed by Industrial production. At 10am, we have Eurozone Trade balance. Later in the day, we get New Zealand Consumer Sentiment  then at 10pm, the Reserve Bank of Australia’s Governor Kent Speaks.

Tuesday-  At the turn of the day we get the minutes of the last RBA meeting where the market will look for granular detail of Australia's rate path. At 9.30 UK employment data comes with Average Earnings expected to show a slight fall from 3.4% to 3.2%. Unemployment Claimant is expected to reduce from 14.2k to 13.1k with the main unemployment rate forecast to remain inline with last months 4%.  German and European Economic Sentiment data is released mid morning then between 5-7pm it is expected that we see another vote on UK Prime Minister Theresa May's Brexit deal, this is as yet unconfirmed.

Wednesday - We see UK RPI, PPI and most importantly CPI Inflation data with the headline number expected to be 1.8% in line with last month. The main event of the week comes in the evening at 6pm with the US Federal Reserve interest rate setting committee meeting and statement. Naturally, there is not movement on baseline interest rates. All eyes will be on the sentiment of the statement delivered by Jerome Powell.  Later in the day, New Zealand quarterly GDP comes with an improvement forecast from 0.3% to 0.6%.

Thursday - A busy day starts with Australian Employment data which is expected to show a slight fall in employment. We hear from the Swiss Central bank on Monetary policy at the start of the European session  followed by UK Retail sales (forecasted to fall to -0.4% from 1% last month) and Public Sector Net Borrowing. At midday, we get the UK interest rate decision from Mark Carney's Bank of England,  which in the face of Brexit will likely bear limited impact with no change expected. At the end of the session, we get Australian Manufacturing and Services PMI’s.

Friday - The PMI theme continues early in the session with French, German and generalised Eurozone numbers first up.  In the afternoon session, Canadian CPI Inflation data at 12.30 alongside Retail Sales. At 1.45 we get the US Manufacturing and Services PMI’s with Existing Home Sales  and Wholesale Inventories.