Duncan Donald

Mon, May 20

KYLIN TALK | Weekly Markets Update 20.05.2019

In what has become customary for UK Prime Minister Theresa May, it has been another tough week. However, this week saw the inevitability of her departure come significantly closer.  The British Pound has recorded 10 straight down days as it fell to 1.2720. The Conservative party leader had been engaged in negotiations with Labour leader Jeremy Corbyn as she tried to reach cross-party agreement to reach the required parliamentary majority on her EU withdrawal agreement. Collusion between both parties remained unpopular with MP’s from both sides, in particular the Conservative party. As such, Conservative MP’s forced Mrs May to outline the timetable of her departure following the final vote on her agreement. On Friday the markets tumbled further as Jeremy Corbyn released a statement that his negotiations with May had gone as far as they can and negotiating with a Government that was facing an imminent leadership reshuffle was futile, especially considering the damage it was doing Labour in the polls. Corbyn reverted to calling for confirmatory public referendum on Brexit.

The Prime Minister will now likely hold a final vote on the withdrawal agreement on the week of the 3rd June after the European elections. She will now be expected to also release a schedule of her departure afterwards. Despite some assurances from members of her party this week, it remains unlikely that amendments made are significant enough to sway parliamentary support. Therefore, it is likely we see a new Prime Minister in the summer. Naturally, we saw a number of MP’s announce their intent to run for leadership with Boris Johnson, Dominic Rabb, Jeremy Hunt, Amber Rudd and Esther McVey to name a few.  It is to be expected that the party will be looking for a pro-Brexit leader who would look to avoid a no-deal Brexit, whilst it could be seen as a positive that a fresh approach could invigorate the negotiations with the EU, but the key question which remains is How!

All of the available successors have played a significant part of the negotiations to date, Dominic Rabb for one was the PM’s Brexit negotiator, he for one knows the rigidity of the EU as they stand resolute on further negotiations. As the potential candidates start to publicly campaign, it will be very interesting to see how they feel they can significantly impact the negotiations and ultimate departure process. Expectation remains that further disruptions will weigh on the UK and the Pound as confidence in the party remains at all time lows.  In the short term, it looks likely that the coming weeks bring a further series of indicative votes within Parliament as May looks to gauge what could gain support ahead of the meaningful vote in early June.

The market driver of the week was the further escalation of the trade negotiations between the US and China as Trump issued further tariffs in spite of what seemed to be positive progress over the final months. Perhaps banking on the fact he believes that the US economy is in a stronger position and can deal with an elongated period of negotiation more comfortably. Nevertheless, the markets traded heavy as a flight to comfortable assets ensued and stocks plunged. Naturally, the Yuan value fell significantly taking the USD/CNY to concerning levels for the PBOC.

As the more fraught trade negotiations progress with tik-for-tak retaliatory tariffs issued and threatened, a cloud will remain over the market. In a week that saw the US/Canada/Mexico trade impasse lifted, there remains great disappointment that the US/Sino agreement has hit issues. Trade agreement aside, the fall of the Yuan raises a secondary concern, in that the PBOC will be looking to protect the 7.0000 level in USD/CNY. Trump and the US have been historically critical in currency intervention to protect value levels, there is, of course, a large element of irony in that although not currency intervention, Trump could be guilty of verbally influencing markets through his almost-daily tweets.

One thing that remains certain is with the latest twist in the trade negotiations, from a monetary policy perspective, this could likely give greater cause for concerns, in particular from the US Federal Reserves Jerome Powell whom we'll hear from later this week. As you will see below, there is a host of FED Committee speakers throughout this week and the sentiment expected is likely to be cautionary, even despite the strong economic data seen from the US last week.

Over the weekend, we saw two significant political developments. In Austria, a further blow to the Eurozone was formed as a snap election was called after Chancellor Sebastian Kurz leadership was compromised by a Junior partner being caught on video offering government contracts for political campaign funding. In Australia, there was a surprising outcome in their general election as Prime Minister Scott Morrison came from behind to gain victory in the nation's elections. The Australian Dollar enjoyed a rally as Morrison pledged to take the necessary steps to get the Australian economy back on the right path.


The Week Ahead

Monday -  First up for the week is the UK’s Rightmove Housing data before Japanese Preliminary GDP. In the European session, we receive German PPI and Bundesbank Monthly report. With Canada on holiday, it is a relatively quiet afternoon aside from UK MPC speaker Broadbent and US FED member Clarida speaking

Tuesday - First up is Federal Reserve Chairman Jerome Powell. This is shortly followed by the minutes of Australia's Monetary policy meeting, which with them having elected to hold rates at 1.5% against market consensus opinion could prove interesting. In the UK, we have the UK Inflation Report Hearing before CBI Industrial orders at 11 am. Again, very little data of note and more FED speakers as Evens and Rosengren speak late afternoon UK time.  In early NZ hours, we see their Retail Sales Data

Wednesday - We start with Japanese Machinery Orders and Trade Balance. Then the focus shifts to Australia, with MI Leading Index, Construction and the Reserve Bank of Australia’s Lowe delivering a public address. In the UK, its a big day with headline inflation data including RPI, CPI and Core Cpi as well as Public Sector Net Borrowing data. In the US session, we see the release of Canadian Retail Sales and US FED member Williams speaking. At 7 pm UK time, we get the minutes of the April Federal Open Market Committee (FOMC) Meeting, with focus on any hints about the pace and direction of US interest rates

Thursday - In what will be a big day for the Eurozone, the day starts with Purchasing Managers Index data from the broader Eurozone, France and Germany.  At the same time, we receive the German Manufacturing data as markets look to see if Germany can shrug of the downturn in data. Shortly afterwards, Germany is under the spotlight again with the IFO Business Climate data.  In the afternoon, we see US Unemployment claims and Services and Manufacturing PMI’s. In the evening, we get a  glimpse of Trade Balance data from New Zealand

Friday - In a day that will likely be dominated by the run into the European Elections, from the UK we get Retail Sales and CBI data. In the US session, we get Durable Goods and Core Durable Goods data