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Morning Brief – Thursday 31st

Europe: Wood and Trees

 

US: Oil on troubled waters

 

 

When the history books are written on the 2016-2019 period of the UK, it is odds on that writers will scratch their heads to explain that while the UK nationally was convulsed on leaving Europe or remaining in Europe, the mystery was why there have not been more cogent discussions about what exactly was the Eurozone economic picture and therefore what the UK was relinquishing by exiting from Europe!

 

Growth in Eurozone Gross Domestic Production Q3 2018 was 0.2% versus the UK’s 0.6%-hardly sparkling but three times that of the Eurozone! Italy is back in recession-no surprise there as Italy has had almost as many recessions as governments in the past 50 years! Eurozone industrial production is down 3.3% versus that of the UK of down 1.8%. Eurozone businesses have just reported the weakest output figures for 5.5 years! So, what should the UK growth figure look like on a “normalised” basis? 2.5%.

 

 

So, in summary the Eurozone economy is certainly not what some Remainer enthusiasts crack it up to be! Finally, and importantly since it is one of the best economic indicators of prosperity, average unemployment in the EU is 9.1% and in the UK 4.4% using the latest available figure as at June 2017.

 

 

So, the big questions are what sort of access we will have to/from the Eurozone and what our trading relationship will be going forward. History suggests that in the event of a no deal Brexit, in time those links will be re-established. What markets are agonising about is how long that will take and at what cost to both the UK and to the Eurozone.

 

 

Today Eurozone growth for Q4 will be released and is expected to be 0.2% versus the targeted 0.4% forecast. GBP remains steady versus both the USD and the EUR. FTSE remains at 7000, Gold at $1307 and Oil’s West Texas Intermediate at $55. Markets have paused while they absorb the expected pronouncements from the Federal Reserve that have dampened down rate rise expectations and soothed with forecasted inflation at 2%, sustained economic expansion and strong labour markets.

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Wednesday 30th

Eyes on the Federal Reserve

 

 

Today sees the first-rate setting meeting of 2019 at the Federal Reserve. The market expectation is that they will leave rates unchanged but what is of much more focus is what is said about interest rate changes going forward. Will the Fed water down further expectations of rate rises given their concern that the US economy is still not sufficiently robust to withstand sharper rises? What is sure is that the Fed will not want to box themselves in to a fixed timetable of rate rises despite the market wanting to understand a well-choreographed programme. Therefore, expect some words around the Fed not able to be specific on this subject until further economic releases clarify the strength of the underlying US economy.

 

 

Meanwhile the USD is relatively unchanged and the focus in currency markets has been on GBP and the theatre in Westminster. After a wobble last night GBP has recovered some of its losses this morning and overall has declined approximately 0.5% against the major trading pairs. Brent Crude is back over $60, and the FTSE is slightly firmer at 6900.

 

 

For a change while we wait for the Fed and for TM to return to Brussels to do battle on the terms of the UK’s Brexit, today or rather this morning as I write the words of 10CC’s song Wall Street Shuffle do NOT apply!

 

 

Do the Wall Street Shuffle

Hear the money rustle

Watch the Greenback tumble

Feel the Sterling crumble

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Tuesday 29th

No Deal Exit Off The Table?

 

 

 

With UK MPs due to debate a number of amendments to TM’s Brexit Deal this evening at 7pm, markets are pricing in the assumption that a No Deal Brexit is off the table. GBP is set for its best monthly performance for a year so what could possibly go wrong?

 

 

The European Research Group of MPs believe that no deal is better than a poor deal. Funnily enough the Prime Minister believed that until she put her deal on the table which has the dubious distinction of being the least worst bad deal. GBP remains steady and holding above USD1.31.

 

 

Suppose just suppose that perceptions do change after tonight that a No Deal is still a possibility, GBP will look very different tomorrow morning. For those GBP sellers needing to buy USD and EUR it would look sensible to hedge all or a good part of their exposures. The old adage, Buy the Rumour, Sell the Fact may be apposite in the next 24 hours.

 

 

Elsewhere gold remains above USD 1,300 per ounce which is a 7 month high and symbolic of the uncertain world we find ourselves in with Trade talks, the sellotaped temporary fix on the US Shutdown and European politics all in the mix and adding up to a potent brew of market moving factors.

 

 

So here we go again in the drama which hopefully is not going to turn into a full blown crisis in UK politics. Buckle up and see what happens this evening!

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Monday 28th

The calm before the storm……?

 

 

So that’s the question that markets face today: will tomorrow’s Brexit Debate in the UK Parliament be a damp squib defined as inconclusive or Parliament deciding to apply for an extension to the 29 March Brexit date? That perversely given that fact alone solves none of the Parliamentary disagreement, it will be taken positively. The outcome outliers are: Parliament backing TM’s deal which would even more perversely be seen as a much bigger positive or, heading for the door with No Deal which would be taken as a massive negative for GBP and the UK. Acres more newsprint will be devoted to the various amendments and the probable/putative outcomes to tomorrow night but those are the principal themes.

 

 

While we plough through all those articles, spare a thought for the market that affects everyone whether they are homeowners or tenants. London property is the bellwether for the UK stock and currency markets and represents a key indicator for prosperity and most importantly confidence. In 2018 turnover in the London property market fell 14% from 2017 and is now at its lowest level since 2008 which was of course the year of the Crash. Enter from his Chicago base Kenneth Griffin super successful hedge fund supremo who in the past weeks has embarked on a major property acquisition spree in NYC, Chicago and now London where last week he snapped up a £95million house in Carlton Gardens W1. For those who are interested in such stats-e.g. the UK Chancellor of the Exchequer(!)- this will involve HMRC collecting £11,313,750 in Stamp Duty on the Carlton Gardens property. If this sounds mad, I would not bet against Mr Griffin and it is a sure thing that top end property agents will be thanking their various Gods for this news and hoping for a knock on effect in the wider market.

 

 

So there we have it: is the UK poised to plunge into an economic abyss or, once the Brexit dust has settled does this represent one of the great opportunities for UK plc and all of its markets? GBP is lower than on Friday night but is holding up well this morning, the FTSE is a little lower and WTI and Brent Crude Oil are both off 2%.

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Friday 25th

Once; Twice; Four times a winner!

 

 

The Pound was rewarded overnight by traders in the New York and Asian sessions, pushing the UK’s currency back towards levels not seen for some 20 months. Today’s session initially drew limited support for the Pound given the fresh resistance levels that the UK currency approached overnight. Positively, this afternoon, a headline crossed terminals that Julian Smith, the British government’s enforcer, had informed parliamentarians that the Brexit agreement can be reopened if an agreement is created to produce legally-binding changes to the Irish backstop. The news decreased the headwind that the UK government would face in improving the extant Brexit deal. Base case outcomes were therefore revised upwards slightly, allowing the Pound to enjoy a renewed bid and finish four days out of the five this week comfortably in the Green. The US Dollar has struggled today, losing close to 0.5% on the day. The reason for the fall is the Federal Reserve which comes into focus once again next week. The Reserve will publish its next interest rate decision on Wednesday evening next week with the Reserve widely expected not to raise rates. The pressure on US interest rates in late-cycle economic growth is allowing the Dollar to slide against its international counterparts.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Thursday 24th

EURgh.

 

 

Yet another dry, somewhat lacklustre and wholly uninspiring monetary policy press conference from the European Central Bank’s President Draghi. Eurgh!

 

 

During yet another round of disappointment to the long-term normalisation of European monetary policy, Draghi announced that rate setters acknowledged downside risks are growing, with the outlook for short run economic growth drifting lower. Draghi maintained optimism over the medium run that allowed him to reiterate the dreary and uncompromising forecast to keep incumbent monetary policy conditions intact at least through the summer of 2019.

 

 

Investors were not impressed by Draghi’s statement, selling the Euro in droves and forcing EURUSD well below its 1.14 upper bound, falling to an intraday low of 1.1306. The market still does not price in even a 10-basis point hike in 2019, showing its disdain for Draghi’s central bank. Immediately, the central bank does not anticipate a recession as its base case scenario. However, during the press conference that followed this afternoon’s event, super Mario did suggest that liquidity (read interest rates) will remain plentiful (read low) throughout the next decade.

 

 

The Pound traded within a tight rate today, flirting with the 1.15 level against a more turbulent Euro. Market remain in the lurch awaiting further news on Brexit ahead of Tuesday’s vote

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Wednesday 23rd

Golden Week?

 

 

After a horrid close to last week with a loss in Sterling totalling some 0.4% on the day, this week has delivered a far brighter fortune to the Pound… so far. Soaring for the third consecutive day and putting Sterling on track for a record-breaking week. Enjoying a staggering 0.6% appreciation on the day, the Pound now stands close to key resistance levels at 1.15 against the Euro and the mid-1.31s. The change in the value in Sterling most closely resembles the shifting attitude of traders and investors with respect to the Article 50 deadline and the wider Brexit deal. Speaking at the 2019 World Economic Forum in Davos, Switzerland, the UK Secretary of State for International Trade affirmed his willingness for an extension to the Article 50 deadline. The pro-Brexit minister’s words lifted Sterling through the important 1.30 mark against a weakening US Dollar and paved the way to the lofty heights at which Sterling closed the day’s European trading session. Despite losing mild ground in the US Session so far, the Pound still remains well-bid. Progress in the House of Commons today also fostered support for Sterling with market participants growing increasingly confident that the UK will not drop out of the bloc on 29th March.

 

 

Speaking at Davos this afternoon, German Chancellor Merkel has spoken of the need for a swift return to “normal” monetary policy. Whilst the European Central Bank remains independent in its capacity to set monetary policy with a staunchly dovish stance towards policy, the political pressure from Europe’s largest economy did not go unheeded. The Euro therefore won today’s battle over the US Dollar with the cross fast approaching the key resistance level at 1.14. The ECB will publish its latest monetary policy decision tomorrow with markets waiting to hear how the central bank will acknowledge growing downside risks to European economic growth and dwindling market expectations for a 2019 interest rate hike. The Euro remains poised, therefore, for a rock day tomorrow.

 

Discussion and Analysis by Charles Porter

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Morning Brief – Tuesday 22nd

It’s in the fine print:

 

 

The universe of possible Brexit outcomes now more than ever resembles an outstretched Chinese hand fan. Spanning a spectrum of some 180 degrees from hard Brexit on 29th March 2019 through to its polar opposite, no Brexit at all, the decisions facing the Prime Minister, and increasingly facing Parliament, are growing ever more complex. Tabling an amendment to the government’s motion yesterday, the leader of the opposition, Jeremy Corbyn, has explicitly opened the door to a second referendum. Mr Corbyn, who still finds himself at loggerheads with Theresa May over her refusal to rule out a no-deal Brexit, has proposed identifying Parliament’s feelings with respect to several possibilities. Firstly, Labour’s amendment requires “ministers to secure sufficient time” in order to consider opposing options. Most importantly, however, the amendment suggests “legislating to hold a public vote on a deal or a proposition that has commanded the support of the majority of the House of Commons”. So what does this mean in English? Well, should a deal be provided for by the collective will of the house of commons or majority position found, the public should be consulted on whether or not it wishes to accept it. To you and me, this means a second referendum on Brexit containing whatever question the House of Commons has managed to agree upon. Whatever this means to the UK, to me, to you, one thing’s clear; markets liked it, bidding the Pound up some 0.5% on the day.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 21st

B-Day!

 

 

The pun above was simply too good to miss. Musing upon its formation ahead of May’s speech before the House of Commons this afternoon its brilliance seemed surpassed only by its malleability and simplicity. Perhaps a pun on the gift giving on one’s day of birth should May’s speech have been a triumphant suggest; otherwise a patriotic reminder of the landing on the beaches of Normandy should the performance have stood the chance of changing the course of European history; upon the maturity of an unspeakable shambles, it could even be a pun on a plumbing fixture commonplace in continental Europe used to clean one’s… see Wikipedia for the rest. Despite the brilliant malleable simplicity of the pun, having watched May’s speech closely, none of the three interpretations appear appropriate!

 

 

Certainly, as is clear from the foreign exchange market, May’s deal cannot be considered a path defining moment in the future of Britain’s relationship with Europe – these events normally invite a shift of more than 0.5% in the exchange rate! Sadly, neither might it be considered a gift to parliament nor the Commons’ reaction a birthday-like reward to Mrs May! Much to the disappointment of my title, even the greatest sceptics of May’s performance this afternoon would not have condemned her words to the status of… See above.

 

 

Enough fun. What did May really offer? Well first off, to the immediate disappointment of markets, she ruled out delaying Brexit negotiations seemingly putting a lid on the market-friendly suggestion that Article 50 be delayed. Counterbalancing this disappointing news, May quickly followed up by extending Parliament’s right to have a greater say in the future UK-EU trade deal. Overwhelmingly, however, from where I’m sitting, Plan B is Plan A with its fingers crossed even tighter. As a Conservative pro-second referendum Member of Parliament stated on Twitter, “It’s like last week’s vote never happened”.

 

 

MPs and markets now have a week in order to digest the PM’s statement before voting on what will materialise as an overwhelmingly neutral motion. The Pound immediately tried to test the lower bound of today’s trading range, however, finding limited support and encouraged by the inclusion of Parliament in the final vote, the Pound rose to test and struggle to break 1.29. From the looks of things, this rate will not survive tomorrow unless something tangible is found to support the largely technical move – sell the Pound fast?

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Friday 18th

Bah Humbug!

 

 

December’s retail sales data has disappointed expectations, encouraging a sell-off in the Pound Sterling throughout today’s trading session. Snapping a near-perfect week of gains for the domestic currency, the Pound traded at times on half of one percent weaker on an intraday basis. The headline figure of house hold goods was down some 2.3% with sales for the period of Q4 registering a 0.2% fall. From a technical perspective it is arguable that the Pound was due a correction following sharp appreciation based upon fundamental changes to the macroeconomic environment. However, it is largely undisputed that the damning picture painted by the data has generated a gradual headwind to today’s trade. The FTSE100 has rallied admirably today in the face of a weaker Pound Sterling despite the underwhelming retail performance. British Prime Minister Theresa May has a challenging weekend ahead of her before she presents her plan, or rather plans, ‘B’. Voting will not be held on May’s alternatives before the 29th January, however, make no mistake, financial positioning in the foreign exchange markets will be virtually instant as participants express their feeling about the permissibility and productivity of plans at the time of unveiling. May has held conversations with her European counterparts with limited reported concession building taking place, leaving Sterling unable to secure another winning day.

 

Discussion and Analysis by Charles Porter

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