Brexit negotiations causes sterling and euro to whipsaw, as USA investors adjust themselves to inevitable rate rises and QT
Brexit was back on the international news agenda radar on Thursday, as the two leading negotiators met once again, in order to attempt to put together a road map for the UK’s final exit. How long the remaining EU27 can continue to suffer the UK’s obfuscation and time wasting, remains to be seen. However, Britain has to exit by March 2019, therefore the essence is on the U.K. to get a deal, as the E.U.’s position is quite clear; “leave, you won’t be missed, your country’s economy will be harmed, the Eurozone will stay strong”. The euro and sterling whipsawed throughout the trading sessions, as negotiations took place during the day. Sterling had initially dropped sharply, but then recovered as (once again) Mr. Barnier, the E.U.’s chief negotiator, held out an olive branch and displayed: patience, courtesy and diplomacy towards the hapless and unprepared David Davis, from the UK’s Tory government.
Whilst Davis’s prevarication continued, Theresa May delivered a speech in London, defending the free market, presumably to counter the Labor Party leader declaring neo liberalism to be a failed ideology in his closing speech at the end of his party’s conference on Wednesday. Mark Carney also chimed in after May’s appearance, in an event marking the twenty year anniversary of the BoE’s independence, whilst smoothing over the gaps in his logic, regarding the U.K. being strong enough to withstand rate rises over the coming months. European calendar news centered on Germany’s CPI coming in right on forecast at 1.8%, whilst the GfK consumer confidence index for Germany came in at 10.8, falling from the record print of 11 last month.
Optimism remains high on Wall Street with investors and bankers feeling confident that Trump will push through some form of tax reform into becoming law. The narrative from the White House appears to center on the breaks being more favorable for Middle America, as opposed to Wall Street and the one percenters, who’ve witnessed their wealth balloon since the USA went into recovery mode from approx. 2011 onwards. In terms of economic calendar news, the latest annualized GDP figure, coming in ahead of forecast at 3.1%, added to the overall optimism, as investors now believe the Fed have the green light to raise rates and begin to unwind the infamous $4.5 trillion balance sheet. Weekly jobless claims are creeping up in the USA, missing the forecast, to come in at 272k. Encouraging hard data for the USA continued with August’s advanced goods trade balance, shrinking to -$62.9 billion.
With GDP rising, and much of the hard economic data appearing to support the Fed’s stated intention; to raise rates and begin a program of quantitative tightening, the dollar fell marginally versus its main peers. The U.S. dollar index fell by circa 0.2% on Thursday, the dollar/basket of currencies index, despite recovering marginally over recent weeks, has already lost circa 8% in 2017. USD/JPY fell to S1 and by circa 0.3% to 112.44, GPB/USD rose through R1 and by circa 0.4% to 1.3429, EUR/USD also rose through R1 and by approx. 0.3% to 1.1780. USD/CHF fell by approx. 0.2% on the day to 0.9703. Similar USD losses were seen versus both Australasian dollars.
The euro began the European trading session positively, however, the single bloc currency experienced mixed fortunes versus its peers on Thursday; up versus USD and the Aussie dollar, EUR/GBP gave up its gains to end the day close to flat on the daily pivot point, a pattern repeated with EUR/CHF, EUR/JPY and EUR/NZD. Germany’s impending coalition choices and Brexit were proving to be the biggest driver of the currency’s value, versus its peers on the day.
Sentiment ebbed and flowed in and out of sterling on Thursday, in direct correlation to the speeches delivered by the various European political players. Sterling fell initially as the markets prepared for the UK’s Brexit position to be explained, with cautious optimism displayed by both sides, the British pound then rose during the late period of the European session. However, the currency ended the day close on flat versus the majority of its peers, perhaps the currency is as exhausted and jaded with the Brexit narrative, as the majority of journalists have become. GBP has risen over recent months versus USD as a consequence of a weak dollar, rather than any inherent sterling strength. The recent rise versus EUR, from EUR/GBP breaching 93, to recede to approx. 87, with no substantial Brexit progress being made, is a curious phenomenon. Whilst many analysts have altered their views with regards to the pound’s value, there are still many experienced analysts standing by their predictions made earlier in the year, that euro v pound will reach parity, before the U.K. actually exits the E.U in March 2019.
EQUITY INDICES AND COMMODITY DATA FOR SEPTEMBER 28th
• DJIA closed up 0.18%.
• SPX closed up 0.12%.
• NASDAQ closed flat.
• STOXX 50 closed up 0.22%.
• DAX closed up 0.37%.
• CAC closed up 0.22%.
• FTSE 100 closed up 0.13%.
• Gold traded up circa 0.3% at $1287.
• WTI oil fell by circa 1% to $51.75.
KEY ECONOMIC CALENDAR EVENTS FOR SEPTEMBER 29TH
• German retail sales are forecast to rise to 3.2% YoY, from 2.7%.
• German unemployment is forecast to remain unchanged, at 5.8%.
• The UK’s nationwide house price index is forecast to fall to 1.9% YoY, from 2.1%.
• The UK’s GDP is expected to remain at 1.7% annualized.
• Eurozone CPI is predicted to rise to 1.6% YoY, from 1.5%.
• Canada’s annualized GDP is forecast to fall to 3.9%, from 4.3%.
• USA core personal consumption is predicted to stay unchanged, at 1.4%.