Following a low volatility European trading day, the US session remained subdued as banks and the public observed Labor Day. A lack of confidence in emerging markets continue to be the dominant theme, with investors still unwilling to risk their money in assets including the Turkish Lira and the South African Rand despite the immense discount priced in. With the Governor of the Bank of England speaking today, Brexit once again looms as a risk for the Pound. In Europe, markets continue to monitor the evolution of political risk in Italy as bond yields trade at an immense premium over their neighbouring EU counterparts. With the US back up and running following the bank holiday, we have already seen a patriotic bid behind the greenback. In South Africa, perilous economic growth data is due to be read. The pragmatic bet would be for high risk around the event, with growth expected to be only 0.6%. Even smarter money would bet for considerable delay surrounding the release!
Should I Stay or Should I go?
Bank of England Governor, Mark Carney, will speak alongside his senior colleagues (Andy Haldane, Chief economist; Silvana Tenreyro, and Michael Saunders, external members of the Committee). The future of the governor at the Bank has dominated news headlines in the UK for the past few days. Market interest has grown feverish as the Governor and Treasury failed to deny claims that the Canadian was considering extending his term beyond 2019; only a few months after the UK is due to leave the European Union. The rumours were initially unveiled in London’s free newspaper, the Evening Standard, which remains under the editorship of Dr Carney’s previous appointer to the Bank, George Osborne (former Chancellor).
Despite offering a branch of Stability to the UK economy as it navigates the choppy waters of unprecedented change, the dovishness of the incumbent Governor is placing a weight upon Sterling markets. Given that the price action in Sterling markets is largely being driven by Brexit phenomena, the value of certainty could outweigh the risk of extended monetary loosening.
Frugal Fiscal Fight:
Markets behaved somewhat sensibly around major Eurozone elections over the past 12 months. The Euro staggered amidst the French elections which saw the far-right candidate Marine Le Pen look threatening for a moment. Following this, subsequent German and Italian elections attracted considerable attention, but saw little punitive trading action within the Euro, equity and fixed income markets. Now, however, the story is somewhat different. A coalition of moderate chaos between the Italian right-wing “League” party and the anti-establishment Five Star Movement is facing a testing point.
Progress on achieving a fiscal spending plan for the expected tenure of this fragile coalition is limited. On top of this, the Stability and Growth Pact limits spending to a deficit of 3%; a tough target for a country with a present liability of debt that shouts to the tune of 2.3 trillion euros. The plan is due to be presented in September and markets eagerly await to learn the composition of it. Any hint of internal division and propensity for public unrest would sent Italian yields soaring further and, coming from a government that has already expressed a desire to leave the euro, could slash the value of the Euro greatly.
Back with a Bang:
Labor Day in the US brought with it an anticipated lack of volatility and thin trading conditions. This morning has been marked with a foreseen bid in the Dollar as a lack of capacity to source the Dollar yesterday is met with renewed liquidity and action today. This afternoon, markets will look forward to manufacturing and employment ISM data releases that are anticipated to come in slightly weaker than previous results. With the Dollar having rallied by as much as 11% since April, domestic economic data will be watched closely to analyse whether a raging US economy is still sustainable.
Reserve some for me!
South Africa was one of the first economies to be hit by the Turkey related emerging market sell-off. The reason was that earnings in the sub-Saharan nation were amongst the worst across the EM spectrum both when considered in absolute terms, but also when adjusted for risk. Now, the sell-off continues at an even more aggressive pace. With Trump turning his sights on South Africa and now a central banking crisis, the Rand is in a hot spot.
South Africa has one of the only privatised Reserve Banks in the world. Set up as a private entity to ensure price stability, their shares trade relatively freely with no associated right to determine policy directly, only to vote for members of the board. With a puny market-cap yet considerable foreign reserves to the tune of $50B, investors are claiming a right to the stockpile. Threatening to hold up the central bank in a legal battle whilst it is currently embroiled in an emerging market sell-off, dwindling investment and a growth crisis, seems like suicide for the Rand. Markets continue to price in the evolving risk, raising the desirability of the Rand.
Discussion and Analysis by Charles Porter