Morning Brief – 2 vs 3

2 vs 3

 

The Pound this morning sits at 2 week highs versus the US Dollar and shows signs of returning to the 1.30 ceiling which it has established for itself lately. However, with little more than three weeks left until the General Election in the UK, the Pound will be vulnerable to political headlines and polling results. As Sky News announced yesterday that former Speaker of the House of Commons, John Bercow, will join its election night coverage to keep things in ORDERRRR, polls suggest the Tories lead the Labour Party by about 15 points. It follows that currency markets are hopeful of the prospect of a majority as it provides a clear path to resolving Brexit and clearing the impasse that has dogged the UK Parliament over the last few years since the referendum was held.

 

Following the speeches offered to UK businesses at the Confederation of British Industry event yesterday, little has changed. In a pragmatic and fiscally responsible change of tone, Johnson has announced he will postpone promised cuts to corporation tax. Constraints on public finances that have caused disputes between Johnson and his Chancellor Sajid Javid whilst formulating the Conservative manifesto look therefore to have swung in Number 11, rather than Number 10’s favour. The claim that Tory leadership, cabinet and MP hopefuls are rallying behind the PM’s secession deal also added to the support that polling results are affording Sterling markets.

 

Despite its international bias and therefore exposure to a rising Pound, the UK’s headline equity benchmark, the FTSE100, has held up well finding support at 7,250 in the last week. The FTSE250, the more domestically orientated collection of UK stocks, has felt the support of polling data and the prospect of a Brexit resolution too, rising to 1-year highs and trading as high as 20,500. The wind will be taken out of Sterling and equity markets if the polls show a more divided electorate as the election gathers pace ahead of the December 12th vote.

 

In the first move of its kind since 2015 the People’s Bank of China (PBoC), the Chinese monetary policy authority, cut rates on its seven-day Reverse Repurchase operation. We’ve heard a lot about the Repo market in recent months but essentially the facility provides short term liquidity into Banking markets that aren’t providing adequate levels of money supply on their own. Crucially, the move by the PBoC to cut the rate on the product from 2.55 to 2.5% represents a loosening of policy in support of the Chinese economy. The move demonstrates the vulnerability of a Chinese economy which is sluggishly clinging to growth at around 6% to the Trade War. Whilst 6% might not sound like economic growth figures to bemoan, the expansion figures are at their lowest levels in 30 years. The move supported global equity markets yesterday with the Chinese Yuan moving through 7.0 to the US Dollar once again.

 

 

 

Discussion and Analysis by Charles Porter

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