Tariffs are so last week:
Sterling performed admirably yesterday amidst a risk-on feel. The Pound broke through important resistance barriers at 1.1250 against the Euro (EURGBP 0.888). Against the Dollar, the move was even more impressive, closing above 1.31 for the first time in one month. Across the board, Sterling hit 6-week highs yesterday, with cable trading 3.75% above its August lows and GBPEUR 2.5% stronger when coupled with an appreciating Euro. President Draghi speaks at a summit in Paris today with focus drawn to whether or not the European Central Bank governor will elaborate on the risk he foresees to global growth. The Dollar failed to catch a bid throughout New York and Asian trading sessions despite considerable tariffs raised upon $200BN worth of Chinese exports. Emerging markets paint a mixed picture this morning, staging a partial recovery from a small risk-off strategy in the Asian trading session.
- GBP: Prospect of progress in Salzburg continued to drive the Pound higher despite Lagarde’s admonitions.
- EUR: Bobbing through a quiet sea – could the ECB create a splash?
- USD: The front end of the US yield curve continues to rise with markets beginning to question the longevity of monetary tightening and where a recession may be hiding.
- EM: Two days to go until the SARB interest rate decision. The Rand holds its value despite a continued sell-off in the Lira and other emerging markets.
… Said Sterling. The warnings of Christine Lagarde, Managing Director of the International Monetary Fund, were largely invisible within pricing of the Pound yesterday. In particular, Lagarde mentioned that the UK should do all that it can in order to avoid a “very costly, cliff-edge Brexit”. A no-deal Brexit possibility is highly important for the UK negotiating policy because it widens the perceived win-set of the UK, enhancing the probability of a more beneficial deal, better aligned with the UK’s best-case outcome. Therefore, it is unsurprising that the siding of Phillip Hammond, Chancellor of the Exchequer, with the admonitions of the IMF has been met with considerable back lash from Number 10 Downing Street. This position of the Chancellor has also been echoed by MPs in an open report published today, perhaps weakening the UK’s position heading into an EU Summit in Salzburg this week.
Austria and Germany to the Rescue:
Yesterday’s Brexit bid also supported the Euro. Reports suggesting that Austria and Germany are growing more determined in their conviction to avert a disturbing no-deal Brexit helped the Pound pick up momentum as week as the Euro. In Italy, yields on sovereign debt continued to fall as political economic risk was priced out of the domestic economy and, in turn, out of the single currency. It has been reported that Italy is likely to maintain its budget deficit at only 1.6% of GDP throughout 2019. This remains well below the European constraint of 3% and goes someway to ensure the fiscal sustainability of Italy in the long-run.
Another Day another Tariff:
During the New York trading session yesterday, the White House announced that it would announce its next move in the trade war following market close. The decision Trump announced was to impose a 10% initial import tariff on Two Hundred Billion Dollars’ worth of Chinese exports. This 10% would then raise up to 25% at the end of this year to allow US economic agents to adjust to the prices. The initial reaction precipitated a risk-off move with the Yen rallying modestly and emerging markets losing ground against the Greenback. However, the move was muted, suggesting either markets’ ambivalence towards tariffs or suggesting that doomsday is already priced into foreign exchange markets. Positive risk sentiment has flooded markets throughout the later Asian session and the European open this morning as the informal Chinese response has been for conciliation and suggesting that it may be time to make concessions to support talks, step-down and resolution.
Discussion and Analysis by Charles Porter