Morning Brief – Friday 5th

Dutch Courage:

The Unilever’s back and so’s the Pound. Only months ago, the decision was announced to relocate the Unilever headquarters to the Netherlands, adding to the barrage of negative sentiment that weighed upon the Pound. However, in a surprise decision, the plan has been abandoned and a dual head-quarter arrangement will persevere. Likely involving a multitude of corporate concessions (c.f May’s Conservative Conference speech last week), the decision goes some way to placating post-Brexit trade fears and is giving the Pound a lift this morning. The sell off of global debt has gained further traction with the yield on a generic ten-year US note climbing past an important 3.20%. The sell off is not limited to the tightening US economy, the pickup in bond yields has stretched into Europe and throughout the globe. The move has placed downward pressure on other asset classes, particularly equities as earning in haven bonds grows ever larger. The implication for the Dollar is significant in the long run, adding conviction to the rightful strength of the greenback at present. Jay Powell has claimed US rates could eventually push beyond the neutral rate, adding conviction to the back end of the yield curve last 2019 and possibly decreasingly the likelihood of yield curve inversion and a US recession in the years to come. The UK has benefitted greatly from Brexit sentiment and bond trading action, with a weighted index of bonds hitting a two year high upon the optimism. The performance of reliable domestic assets and global bonds has placed downward pressure on emerging market equities and forex. The Euro has failed to consolidate upon yesterday’s bid and further Brexit optimism, trading down by 0.06% on a trade weighted basis.

Since Market Open:

• GBP:   Bond yields drag sterling higher amidst positive Brexit sentiment.

• EUR:   Amidst turmoil in Italy, the Euro fails to catch a bid from renewed hopes of a Brexit deal.

• USD:   Consolidating returns above 3.20 on the 10-year note, the Dollar leads the charge in a new era for global debt.

• EM:    3.2% annual return on a US 10-year note leaves investors questioning why they’d accept sub-par risky returns in emerging markets. The Rand trades weaker on the day.

Discussion and Analysis by Charles Porter

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