Discussion and Analysis by Charles Porter:
After a somewhat subdued morning and afternoon yesterday, markets kicked to life. An abrupt claim from the Telegraph suggested that the UK and the EU had reached an agreement on the so-called Brexit ‘divorce’ bill. The news supported the Pound strongly, raising Sterling against the US Dollar by as much as 1%, extended to 1.5% as this morning’s session unfolded. Shortly after this news and its verification, South Korea reported that the North had fired an intercontinental ballistic missile. After a relative silence for around two months, the news could have been supposed to destabilise markets. However, the Asian session largely shrugged off these reports; a theme extended into the European open this morning.
Sterling Briefing: Progress made to progress
Yes, the process may well seem endless, however, it’s conclusion will come all too soon with the 29th March 2019 sworn to be the date that the UK will leave the EU. Nonetheless, considerable progress has been made in the pursuit of progression!
A couple of weeks ago, markets were, once again, highly pessimistic about the likelihood of December progress. Despite sanguine, or at least benign, comments flowing across the channel, markets arguably continued to under-price the propensity for second round progression in 2017 within the Pound. Their two main concerns were the upset that, in particular, Ireland and any other member state within the EU Council could provide to the prospect of progression. Secondly, the ‘divorce’ bill, or commitment to pay outstanding obligations, was threatening trade talks.
The latter of these concerns was clearly relieved with last night’s credible announcement. Sterling markets continue to rally this morning. It should be well noted that the pre-report exchange level, which was 1.323 against the Dollar and 1.114 against the Euro, will now become important sentiment pivot level.
The overnight resignation of Irish Deputy PM, Ms. Fitzgerald, has curtailed the risk of a snap election. With the problem of the Irish border still looming, the formed concern appears diminished too.
Euro Briefing: The Return of Data
The volume of global data has been low this week, with the economic calendar looking sparse. However, today, Eurozone soft data will be released in addition to key GDP and inflation reports. Inflation has stood in the way of tighter monetary policy in the Eurozone, with even the weak tapering of QE on uncertain ground. This afternoon, at 13:00GMT, November’s German Consumer Price Index, the favoured measure of inflation, will be released. It is forecast to show a tick up in the price level, in a potential sign of increased prosperity within the Eurozone economy.
In light of the significance of the German economy, if confirmed, the increase will spillover considerably into the aggregated Eurozone figure. However, markets could be wise not to overvalue the single currency, given the idiosyncratic performance of Germany, ahead of the other 18. Eurozone soft data, released at 10:00BST, left the Euro largely unmoved.
Dollar Briefing: What Missile?
Yesterday evening, the United States, represented by President Trump and Defense Secretary Mattis, confirmed South Korean reports of an intercontinental ballistic missile fire, coming from the North of the Peninsula. The test of a supposedly new missile not only follows a period of relative quiet from the North, but also brings with it a new threat to the United States and the stability of the global system. Analysts have suggested that due to the height of the missile, it may be capable of reaching the entire US. To paraphrase James Mattis’ comments last night; this is truly a global threat. So why did safehavens not rally?
Gold, the Japanese Yen and the Swiss Franc are only up mildly following last night’s events. Moreover, Asian stocks and markets overnight were relatively ambivalent to the news. However, the other side of the coin to a risk-off strategy has prevailed; US Dollar is facing a considerably headwind this morning.
The Day Ahead:
Consolidation of the Brexit progress will be critical. The PM will be absent from this afternoon’s PMQs. First minister Damian Green may be able to shed light on the developments, however, has a credible excuse not to. Yellen speaks to Congress at 15:00.