Recession fears put markets on alert: Lisbon included

Weekly Brief 16th November

As Harold Wilson remarked in the run-up to the 1964 election, ‘A week is a long time in politics.’ It probably seems like that to PM May after a week of high political drama surrounding her draft EU withdrawal deal.

Brexit Secretary Dominic Raab led the exodus of ministerial resignations, followed by Eurosceptic MP Jacob Rees-Mogg writing to the chairman of the 1922 Committee calling for a vote of no-confidence adding further pressure. With reports that other Conservative MPs have penned their letters, a possible no-confidence motion now appears the most immediate threat facing the PM. There’s also the potential of Parliament not passing the draft deal.

UK currency investors appear to be bracing for further bad news. Sterling had its biggest one-day drop against the euro since June 2016. Meanwhile, implied volatility, a measure of how volatile investors expect the UK currency to be, spiked to its highest level for over two years.

While there was plenty of activity in Westminster, there was little chatter from Brussels at this sensitive stage. EUR/GBP had its best single day performance on Thursday since June 2016.

Britain reported 0.6% growth in gross domestic product, while the Eurozone managed 0.2% expansion in the same third quarter. Germany limped in last with 0.2% economic shrinkage. The forecast was 0.1%, with the euro dipping in response to Germany’s lacklustre news until more results came out. Eurozone industrial production was in fact better than expected, falling only slightly by 0.3% in September.

Earlier in the week it was announced Italian industrial production fell by less than forecast in September. Italy has been weighing heavily on the euro – Back in September, prior to the announcement of the deficit budget, Italy had to pay 2.36 percentage points more than Germany to borrow 10-year money. This week that premium is 3.06 percentage points. The gap could widen further on a downgrade of Italy’s credit rating, potentially weighing on the euro.

USD was held back by Federal Reserve Chairman Jay Powell’s remarks this week, with his comments interpreted by some as an acknowledgment that the US economy could be moving towards a slowdown in growth. Remarks from two regional Federal Reserve officials overnight suggest that a pause in tightening could be very much on the cards at some point next year, echoing Powell. There has been a longstanding discrepancy between how many rate increases the market and the US central bank expects in the US, with the Fed typically being more hawkish.

On Tuesday Washington and Beijing became involved in trade discussions, ‘at all levels.’ Their aim is to prepare for a tête-à-tête between Trump and Chinese president Xi at the G20 summit which takes place at the end of the month.

The joy at that development is not universal among the administration. Economic advisor Larry Kudlow chastised trade advisor Peter Navarro for his comments at the end of last week when he said big business should not be encouraging the president to do a deal with China.

A Financial Times report on Thursday suggested too that China and the US were making huge strides towards agreements ahead of the G20 Summit at the end of November. Positivity surrounding this cool down in rhetoric kept USD strength at bay this week.

CAD slipped to a 4-month low after influential US lawmaker and Democratic Party representative Bill Pascrell said changes must be made to the new US-Mexico-Canada Agreement before it will be passed to the House of Representatives.

Some key strategists have implied that Trump scrapping NAFTA without a replacement could send the Loonie into as much as a 20% fall.

The Bank of Canada raised interest rates, making clear in its latest policy update that it is gearing up to continue with this over the next year.

News out this week shows Australia’s employment rate held steady at 5.0% as the number of people in work increased to 33,000 in October, higher than the expected number of 20,000. The data boosted the Aussie which went up a cent higher on the day.

These positive employment figures are likely to keep Reserve Bank of Australia policymakers pretty pleased and could increase their bullish outlook in the near future.

The Kiwi is heading for a 1.3% weekly gain against USD off the back of solid data. October’s strong manufacturing performance index results and investors rumoured to be thinking twice about the central bank cutting interest rates both helped boost NZD.

Investors made what they could on the 6.2% annual increase in NZ electronic card retail sales this week. The Kiwi is dependent heavily on US-China relations, with commentary from Chinese Premier Li Keqiang suggesting they were looking at resolving trade disputes. This lifted NZD overnight on Tuesday due to commodity and China links.

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