UK Public Finance

Discussion and Analysis by Charles Porter:

Sterling markets once again look more robust at market open this morning. While the outcome of yesterday’s 10-strong ’inner’ cabinet meeting has not been made public, and is not expected to become so within the next few weeks, reports coming from media and privileged cabinet ministers are positive. Dominating the Financial Times this morning, newspapers attest to a consensus within May’s recently divided Cabinet. Meanwhile, Merkel’s struggle in Germany shows little sign of abating, fostering concerns of a second general election. This morning, Reserve Bank of Australia (RBA) Governor, Phillip Lowe, will speak. Following dovish RBA monetary policy recently, this speech confers risk into the Aussie Dollar.

Sterling Briefing: Public Finance

Ahead of what will be a critical Autumn budget, public finances will once again be drawn into focus this morning. Public Sector Net Borrowing statistics will be released at 09:30 BST. Markets could prove to be highly reactive to Hammond’s budget, particularly if the outlook for public spending is sparse and parsimonious. ‘Spread-sheet Phil’ will determine his own legacy tomorrow as markets would perceive the UK economy to be unsupported and uncertain should austerity economics prevail.

There still remains less risk in the Pound Sterling from budgetary politics than from negotiations and Brexit. Household opinion of Brexit remains intact and, if anything, continues to grow. In direct contrast, market sentiment about the progress of negotiations and future trade remains overwhelmingly negative.

The Pound Sterling opens higher this morning primarily due to overnight reports that May’s increased ‘Divorce Bill’ offer has been approved by her inner cabinet. The offer, according to cabinet officials and every text book on negotiating theory every written, is likely to be unveiled shortly before the next EU Council meeting and the internal EU deadline for ‘sufficient’ progress – a couple of weeks away.

Euro Briefing: Escape Route

Ms Merkel has held the office of Chancellor within Germany for the last twelve years. She has well and truly embedded herself as not only part of the German political fabric but become and integral and versed authority within the EU Council. Markets are not pricing her difficulties as considerable political risk – the yield on German bonds remains relatively stable. However, surprisingly, there is evidence of the stagnation weighing on the Euro. Eurozone data is quiet this week with the exception of Thursday’s reading of ‘soft’, sentiment-based, data that frequently proves to move markets.

Dollar Briefing: Sanctions and Sanctions

Two forms of sanction will have a considerable say on the short-medium run path of the US Dollar: Firstly, the possibility for a new set of sanctions that President Trump has suggested North Korea will now face following their accession to the “state sponsors of terror” list. Secondly, the sanctioning of the widely-anticipated Tax reform. With the former considerably within the remit of the controversial President, the latter is now almost exclusively within the hands of congress, will few channels of influence left for the White House. Any new sanctions on North Korea will not, by themselves, create any upside within the Dollar. Instead, any abatement of the geopolitical risk that Pyongyang continues to create will support the USD.

The Days Ahead:

Later this morning, around 10:00 BST, Bank of England Monetary Policy Committee Members, Jon Cunliffe, Ian McCafferty, Michael Sunders and Gertjan Vlieghe will appear before the House of Commons Treasury Select Committee. With the former member being the only MPC participant present that voted against a rate hike, markets will value understanding the internal BoE division to comprehend the future of UK monetary policy. Safehaven assets have become increasingly important with rising global uncertainty and insecurity. Therefore, as the Swiss Franc is a member of this class, this afternoon’s speech by Thomas Jordan, Chairman of the Swiss National Bank, could make CHF markets sensitive.

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