Towards the end of last week, the Dow Jones soared above $25,000.00, whilst the Dollar continued its decline. The two are unlikely to be mere coincidence as the weaker Dollar supports the activities of the outwardly orientated, international, blue-chip companies that populate the industrial index. In the UK, whilst the move has been slightly less parabolic than in the US, the FTSE100 simultaneously broke 7,720 for the first time ever. Equities rage in the UK similarly due to the weak Pound Sterling following the Brexit referendum.
The outperforming currency of 2016 and 2017 thus far has been the Euro. Unsurprisingly, the Euro Stoxx 50 is neither at a monthly, yearly, nor all-time high. The inverse correlation of stock markets and currency markets is nothing new; the phenomenon is almost as old as equity markets themselves. However, the present form of the relationship does shed light on the salience of global ultra-accommodative monetary policy, economic confidence and exchange rates. This morning, the EUR/USD currency pair has retreated back below 1.20, encouraged by a definitively stronger Dollar and mildly bearish Euro. These dynamics mean that, today, the GBPEUR cross threatens 1.13, while cable retreats back towards 1.350. This week, we look ahead to a reading of Germany’s economic performance as measured by Gross Domestic Product. The data release is scheduled for 09:00 on Thursday and will prove salient for the Euro. The strong likelihood of a data-led conclusion to the monetary stimulus program, quantitative easing, is making hegemon-led economic growth imperative within the monetary union.
Sterling Briefing: Shuffle Up
In the United Kingdom, the House of Commons returns following its Christmas recess. Today, therefore, marks the first possible day from which Theresa May is expected to announce her cabinet reshuffle. The first change to 2018’s ministerial composition will be particularly important when considered against the Conservative Party’s 2017 legacy of weakness, division and scandal. At least a partial change is necessary due to the recent resignation of First Secretary of State, Damian Green. This scandal further undermined the position of the UK prime minister making any reappointment critical.
The unwavering thorn in Theresa May’s side and Foreign Secretary, Boris Johnson, is unlikely to see his job taken away. Similarly, the pivotal Secretary of State for Existing the European Union, David Davis, looks almost certain to retain his job. Whilst key cabinet positions, not limited to those above, are unlikely to change, it is not impossible. The injection of uncertainty from the dismissal of a pivotal member of parliament and cabinet minister would, more than likely, have a negative impact upon the Pound. However, a longer lasting sentiment of confidence from a previously threatened, constrained and vulnerable prime minister, could stem the losses.
Euro Briefing: Coalition Draws Closer
A formal German coalition between Merkel’s Christian Democratic Union, its Bavarian counterpart, and Schulz’s Social Democratic party (SPD) could be in sight. More than three months have passed since national elections were held to decide the 19th Bundestag. Angela Merkel has held the position of Chancellor consecutively since the 16th Bundestag was elected in 2005. Her fourth Chancellorship now looks more certain as the SPD seriously entertains talks on another consecutive grand coalition.
Economic performance, both when measured by lagging hard data and more reactive soft data, continues to be strong in Germany. The country therefore looks moderately unimpeded by political instability and the lack of a formal coalition. However, the importance of finding a stable coalition to govern Europe’s largest economy should not be understated.
German political stability has ramifications for Germany, the wider Eurozone and even the UK. The United Kingdom must be met with credible negotiating partners within the European Council. If Merkel’s mandate to negotiate for Germany on the European stage in seen as weak or fleeting, the UK’s ability to secure a deal on Brexit is challenged. Similarly, German political instability will not be permitted forever. Whilst German and Eurozone bond yields have remained largely stable, eventually the polity, and potentially the Eurozone within which it is embedded, would be punished.
Dollar Briefing: Jobs Data Release
There were two headlines from Friday afternoon’s pivotal economic data release: An expected, and positive, level of wage inflation, and an unforeseen, larger than anticipated fall in employment (payroll) numbers. Shown in the graph below (Left), the release saw a considerable sell off in the Dollar as payroll data underwhelmed analysts and investors. As the publication was analysed in further depth following the release, the Dollar regained the value that it had shed moments ago. This morning, the Dollar continues to shrug-off last week’s underwhelming reading of the US labour market. This Friday, the Bureau of Labour Statistics will release its reading of the rate of inflation for the US in December. Inflation data continues to be imperative whilst monetary tightening continues to be inhibited by a price level that refuses to appreciate, suggesting an under-stimulated, and potentially under-productive, economy.
A Canadian employment report was released simultaneously with the United States’ review, generating a series of frantic trends within the North American continent. The release saw the Net Change in Employment variable exceed expectations by almost 70,000. A better-than-anticipated labour market performance led to a fall in the unemployment rate of 0.2% from November. The 0.2% decline was recorded in defiance of a reading that was expected to show a 1-point tick up in the unemployment rate, to 6.0%. A strong labour market performance is usually associated with a stronger performance across the wider economy. The Canadian Dollar appreciated steeply following the release, shown in the graph above (right) against the Pound Sterling. Combined with a weakening Dollar, the USDCAD exchange rate depreciated by 1.11% instantaneously, making the Loonie far more valuable than its US counterpart.
Discussion and Analysis by Charles Porter