Morning Brief – 5th September 2018

Enough is enough:

Emerging markets looked to have snapped once again with the Turkish Lira, the Rand and the Argentine Peso tumbling by approximately 1% ahead of the European market open. Despite hefty domestic FX devaluations, emerging market stock indices have been harmed considerably; a seemingly textbook evolution of a systemic emerging market crisis. Purchasing Managers’ Index data this morning was strong showing a welcomed confidence behind the UK economy. Sterling reacted somewhat ambivalently but did manage to claw back a few basis points. Chaos in US Congress fails to undermine a US Dollar in high demand following Monday’s Labor Day outage.

• GBP: Virtually flat since market open, Sterling acts ambivalently to Carney’s extended Governorship.

• EUR: The Euro is uncertain as mumblings about Euro clearing post-Brexit come to centre stage in Germany.

• USD: Strong ISM data yesterday lifts the Dollar once again to crash through 1.1550 against the Euro.

• EM: Emerging markets wince as the Dollar’s strength threatens fragile economies further.

Pound Sterling:

Okay, Twist my Arm.

A reluctant Bank of England Governor seemingly agrees to one more year. Initially begged and begged by Chancellor Osborne to join the central bank, Mark Carney was due to assume the premiership for a standardised 8 years. However, the hard to get Canadian economist swiftly shortened this to 5 years, citing the age of his children as an inhibition to service. Amidst much market and public coverage, senior ministers and the Prime Minister have suggested that Carney will stay on until 2020 (one year longer) in order to provide consistency to a tumultuous UK economy. Markets weighed the elongation of a dovish governor’s term against the increase in stability neutrally, leaving the Pound unchanged. It is likely, however, that the transitional period will still continue until 2020 making the elongation somewhat trivial.

The Euro:

Frugal Fiscal Fight:

The Euro is oscillating around zero percent change on the day despite the release of underwhelming soft data for the Eurozone. Importantly, the risk surrounding the Italian Fiscal position that is weighing on the Euro has resided slightly. The reduction in risk has been a consequence of a series of announcement from senior coalition members promising to abide by the strict EU 3% budget rules. If the crisis in Tukey continues to mature, the exposure of European banks to Turkish corporate and sovereign debt could undermine the Euro.

The Dollar:

Labor(ious) Day!

With US markets offline on Monday for Labor Day, USD trading volumes were outstanding yesterday. The Dollar appreciated considerably with little hint of a slowdown at market open this morning. Despite considerable domestic political uncertainty in Congress during the confirmation process of Supreme Court Nominee, Judge Brett Kavanaugh, the Dollar continued is mesmeric appreciation.

Emerging Markets:

Another Blow:

Turkey was the one who caught a cold, but it’s South Africa who’s sneezing hardest now. Yesterday, observations of economic growth for Q1 and forecasts Q2 2018 were published, showing that the South African economy has entered into a recession. Despite expectations convening upon a mild expansion, the data came in considerably below the zero threshold, sending the currency spiralling down. Just as former President Zuma had faced, Cyril Ramaphosa now has to content with a shrinking economy within only months of his appointment.

Discussion and Analysis by Charles Porter

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