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Market Analysis

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Back to Reality

Black swans a figment of market’s imagination?

 

If 2016 was the year of shocks, 2017 is becoming the year of predictability. Following on from an utterly foreseeable result in the Dutch election, the French lurch away from the left stopped at the centre. This left the Right-Wing candidate high and dry!

 

Emmanuel Macron, the thirty-nine-year-old former investment banker, married to his high school teacher, who left the Government less than a year ago to form his own party has swept to power.

 

Macron received more than 66% of the vote. The turnout was low, as was expected. Macron becomes the first president since the foundation of the modern republic in 1958 from outside one of the two main parties.

 

The euro shrugged off the news as traders looked forward to next month’s events; the U.K. election and the French National Assembly. One should continue the predictable trend whereas the other, in France is going to be interesting since it is highly unlikely that Macron can win a majority.

 

The single currency briefly broke the 1.1000 barrier before falling back on a bout of profit taking. The political headwinds that were facing the currency at the start of the year have now largely abated. Brexit is the one “fly in the ointment” and continued wrangling will see short term volatility within established ranges.

 

MPC meets as inflation report released

 

The first Bank of England Monetary Policy Committee meeting for a couple of months takes place this Thursday. The outcome of the meeting is beyond doubt. Interest rates will remain at the historically low level of 0.25% and the asset purchase programme is likely to remain at £435bn. although there is room for a reduction.

 

Kristin Forbes who leaves the committee at the end of June is likely to vote for a hike but will again not be able to garner any support. Inflation cooled a little in March and the effect of a steadier pound hasn’t yet fed through into the data. Governor Mark Carney sees inflation peaking at around 2.7% later in the year. Economists generally see it a little higher at around 3% but with Brexit and the General Election on the horizon a note of caution on monetary policy is likely the most prudent course.

 

Sterling is holding its own as the Euro gained on the back of Macron’s victory. Eur/Gbp is mired between 0.8420 and 0.8500. Against the dollar, which is reacting to global risk appetite, Sterling is close to the psychologically important 1.3000 area. With major banks calling the General Election a game changer, the pound should be on a trajectory to bite of a further chunk of its fall following the Brexit vote. However recent “buy the rumour sell the fact” reactions have led to bouts of profit taking before the trend is continued.

 

Dollar on “Back Burner”

 

Despite the constant threat of a “Trumpism”, the dollar is trading in a narrow range against a basket of its major trading partner’s currencies.

 

Against the JPY the dollar has gained close to 4% since making a low of 108.31 in mid-April. The widening of the interest rate differential being a major contributor.

 

The “dollar index”, for those of you interested is made up of; EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).

 

The makeup of the “basket” has been altered only once, with the advent of the euro at the start of 1999. The “basket” is overdue for revision as China, Mexico, South Korea and Brazil are presently not part of the index despite being major trading partners, whereas Sweden and Switzerland are long overdue for retirement.

 

100 was its value in March 1973 at its inception. Since then it has traded as high as 167 and as low as 70.

 

History lesson over.

 

Global risk appetite has become the major driver of the dollar index. Commodity prices are going through a slump although the release this morning of a significant increase in the Chinese trade surplus belies that image somewhat.

 

The U.S. is now less reliant on oil imports following the use of shale and Trump’s approval of offshore exploration.

 

The oil price has fallen back to $ 45 due to a glut of oil on the market and OPEC’s inability to control its members as it once could.

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Brussels Raises the Stakes

May labels Brexit comments interference.

 

In what the Prime minister called blatant interference, Theresa May criticised the EU for a story that the bill for Brexit has reached Eur 100 bio., up from the Eur 65 bio originally discussed.

 

Brexit Minister, David Davies has confirmed that the U.K. will pay what is legally obliged to but that figure is “nowhere near Eur 100 bio. The EU Chief Negotiator, Michel Barnier said he had no desire to punish the U.K. but its accounts must be settled.

 

Publishing his mandate, Mr Barnier said the EU would “put all its efforts” into reaching a deal but said negotiations must start as soon as possible after “ten months of uncertainty” and suggested the outcome of June’s general election would not change anything.

 

The Conservative Party hold a 19% lead over the labour Party in the latest opinion poll.

 

The EU is clearly concerned about its finances post-Brexit so will hold out for its pound of flesh. Germany and France will need to “take up the slack” of the hole created and this will add further strain.

 

FOMC signals June hike  

 

As expected the FOMC left interest rates unchanged in the U.S but the tone of Janet Yellen’s press conference left the impression that the next hike could be as soon as next month.

 

Analysts now believe that the Fed has switched to a four-hike strategy for 2017. Citing inflation running near to target, encouraging employment statistics and rising business investment, Yellen left the door open for a June hike.

 

The Fed’s bullishness is a little surprising considering it is unlikely that the full effect of the two hikes already this year have fed through, the preliminary Q1 GDP was far from stellar and wages growth has been stubbornly weak despite a 4.6% unemployment rate.

 

The dollar reacted positively to the news reaching a six-week high against the JPY. Risk appetite is on the rise again although the dollar index is still unable to break the 100 barrier.

 

The Euro and Pound fell back from recent highs but both are well supported with buyers at 1.0860 and 1.2840 respectively.

 

Macron wins TV Debate

 

The final televised debate took place in France last night with candidates Emmanuel Macron and Marine Le Pen trading insults before clashing over the economy, Europe and security.

 

Macron called Le Pen the “High Priestess of Fear” while Macron received the title “Candidate of Savage Globalization”.

 

The public believed that Macron won the debate with 63% of those polled believing he was the more impressive. Brussels will breathe a huge sigh of relief on Sunday evening if, as polls predict, Macron is voted through to the Elysee Palace.

 

The leader of En Marche (Forward) still has a slightly Euro-sceptic outlook wanting France to be a leader of change in the EU. He has threatened a Frexit referendum if reform is not forthcoming. Messrs Juncker and Tusk will do well to heed the warning.

 

Employment day almost upon us.

 

How do analysts predict the headline number for the non-farm payroll? Well, it is a very scientific process that takes the previous twelve releases, considering any revisions, add them together and divide by twelve. It’s called an average and is as close as anyone can get to a viable method. The average of the last twelve releases has been 182k so it is no surprise that the consensus for tomorrow is 180k.

 

Other data can be researched more thoroughly. It is rumoured that analysts study satellite images of Chinese factories to get a handle on activity as a proxy for trade data. The same technology has long been used to confirm crop reports.

 

The most important part of tomorrow’s report will be the revision to last month’s number. In fact, no revision would be a major surprise particularly since Mrs Yellen would have had access to data prior to her relatively hawkish press conference.

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Two can play that game!

Tusk and Juncker double team.

 

There are many reasons why the U.K. voted in favour of Brexit almost a year ago. One of the main ones was the money wasted in Brussels and Strasbourg.

 

It has been well reported that there was a spat between Theresa May and Jean-Claude Juncker at a dinner last week. My question is “in what role was Juncker fulfilling my meeting May?” Why is there a President of the European Commission and a President of the European Council? It is bureaucracy gone mad. Following the press reports over the weekend, it seems that Juncker despite being a Luxembourger, reports direct to Frankfurt.

 

It is no wonder that the E.U. expects negotiations to take more than two years. The ratification of any agreement could take that time on its own.

 

French Presidential Candidate and favourite to win, Emmanuel Macron, a confirmed European has said that unless there is reform at the top of the E.U. he will be calling a Frexit referendum. Unfortunately, the whole fabric of the E.U. is built around a non-elected body which is fast becoming self-fulfilling.

 

FOMC meets as Jobs data looms

 

As one of the U-turns that have characterized his first one hundred days, President Trump has said that he wishes unusual policy measures could have stayed in place longer to ensure the economy is on a firm foundation.

 

This contradicts his macho stance while campaigning where he criticized the Fed in general and Janet Yellen in particular for retaining ultra-easy monetary policy longer than necessary.

 

Just another example of the difference between Campaigning and Governing.

 

It is certain that there will be no change to monetary policy as the FOMC meeting concludes later. The two rate hikes already this year will take time to filter through to the economy at large and Yellen is very aware of not choking off the recovery which according to leading indicators is not yet able to “stand on its own”.

 

The dollar index remains on a well-trod path. Ample liquidity means that it gyrates between 99 and 100 without any true direction or driver to create a trend.

 

Analysts looking at this week’s non-farm payroll data due for release on Friday have taken the easy option and plumped for the average of the past twelve months as their estimation of job growth on April. That figure is 182k but following last month’s surprise fall to 98k, the truth is it is a lottery.

 

One thing to watch for is a hefty revision to the April figure.

 

Strong U.K. data masks Brexit concerns.

 

Of all the areas of the U.K. economy that could end support, manufacturing wouldn’t be the first area of consideration.

 

Yesterday’s release of manufacturing activity showed an improvement from 54.2 to 57.3 against expectation of a slight contraction. This contrasts with the EU where manufacturing remained static and the U.S. where the New York index fell slightly.

 

It is likely that the fall in the pound over the past year has encouraged exporters both explore new markets and sell more to existing ones.

 

The issues facing the Bank of England are highlighted by the data and the recent performance of the pound. Inflation is continuing to accelerate. Any dampening effect of the pound will take some time to feed through. Weak retail numbers have been offset by manufacturing but this could easily be a series of one-offs driven by seasonal factors.

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Brexit Row Fails to Excite Market

Spat over dinner meeting marks divisions.

 

What was intended to be a private dinner between Theresa May and Jean-Claude Juncker last week has seemingly laid the foundations of division over Brexit.

 

It is perhaps significant that Juncker reported back to German Chancellor Angela Merkel rather than EU Council President Donald Tusk. Juncker apparently left the dinner “ten times more sceptical than he was before”.

 

The main disagreements appear to be over the treatment of EU citizens in the U.K. and the payment of a fee or fine that isn’t part of the Lisbon Treaty. Mrs May wanted an outline agreement on treatment of E.U. nationals by the end of June and Juncker said that thinking this could happen means May is “living in another galaxy”.

 

Why would the U.K. expect anything other than snail paced progress as that is how everything works in Brussels?

 

Traders have not been phased by the news and sterling remains well supported. It is clear that the belief that the country needs a strong and well supported Government before it can start to deal with any misinformation being peddled by Brussels and/or Frankfurt.

 

FOMC meeting likely to give “Advance Guidance”

 

The fact that the Fed “used up” two of their likely three hikes for 2017 in the first few months of the year has left traders wondering the if the strategy has moved from three to four hikes.

 

The recent data releases haven’t pointed to any change. Last week’s preliminary GDP release coupled with the last employment report show an economy that is reacting to monetary policy in the desired manner. Even President Trump said that he had hoped monetary policy could remain looser for a little longer. This is a massive departure from his campaign when he took every opportunity to criticize the Fed for continuing unusual measures for longer than necessary.

 

In her press conference tomorrow following a “no change” decision, Mrs Yellen will likely point to data releases both recent and to come saying that “the FOMC will be guided by how the economy performs”. So, her advance guidance will be to retrospectively react to data that has already been released. Curious!

 

Trump would meet Kim “in the right circumstances”.

 

Now that their THAAD missile system is operational in South Korea, Donald Trump can increase the diplomatic pressure on Kim Jong Un the rather unorthodox leader in Pyongyang.

 

Trump has said that he would be honoured to meet with Kim. It is not hard to imagine the “right circumstances” but I doubt that Pyongyang would be the venue and since Kim is facing a travel ban as part of the U.N. sanctions it won’t be in Washington either.

 

It remains unlikely that the U.S. is going to allow Kim to just keep firing test missiles until he get it right. Although there is some scepticism in the U.S. that that will ever happen and isn’t, in any case, Kim’s likely aim.

 

Risk appetite in the FX market remains intact with traders seemingly comfortable that Kim’s ability got create a nuclear arsenal is a long way in the future, if at all. The dollar is gaining ground against the JPY, trading well above 110 and looking to test resistance at 112.20.

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Macron Threatens Frexit

EU must reform.

Emmanuel Macron the favourite for the French Presidential Election is Brussels Poster boy for the future.

However, Macron seems to have not been well enough briefed. He is now saying that unless the European Union reforms, it will be faced by a Frexit vote. The campaign has now entered its final week and Macron has sensed wavering in her opponent Marine le Pen’s resolve.

Opinion polls put Macron 60-40 ahead and to appear more centrist, Le Pen has appeared more conciliatory in her attitude to the EU and single currency. While she is still advocating departure from both she has loosened the timing somewhat.

The single currency has fallen back below the 1.0900 level versus the dollar and is struggling to maintain 0.8420 versus the pound. Markets are very thin today with the May Day Holiday.

Trump’s first 100

Anyone finding that President Trump’s first one hundred days in office were anything other than exactly as expected must have been living in a cave!

Some valuable lessons have been learned that should stand him in good stead. His “if I say it it must be true” and “if I say it it will happen” mantras clearly do not work in Government as they may have done during his campaign.

He has been defeated (an unusual experience) over Obamacare, his tax plans haven’t taken shape and trade has so far not been affected.

Two of his main pledges; to build a wall between the U.S. and Mexico and label China a currency manipulator are very much on the back burner. The latter is very much a political “hot potato” since Trump now finds himself in need of Chinese help with North Korea.

Kim Jung Un the North Korean Leader continues to thumb his nose at Trump and is considered a clear and Present threat to Asian stability. China are totally invested in ensuring that Asia remains the global industrial powerhouse as much as it sees the west as its primary customer.

Its employment week (already)

Regular readers will know that I treat this week with the apathy of someone who has seen it all before. The depth of the market now means that releases like last month’s which would, in the past, have brought havoc are barely worth returning from the pub for. Oh sorry, that’s something else that has probably changed.

So, does anyone have any idea about the non-farm payrolls this week. It seems that every month +180k have become en-vogue. Even following last month’s +98k disappointment, we are right back to +180k for April. Only time will tell. The unemployment rate will remain well below 5% but average hourly earnings continue to be sluggish which concerns the Fed.

Before the NFP bunfight, the FOMC will meet and pronounce on interest rates. Unlike her ECB counterpart, Janet Yellen can concentrate on the U.S. as a whole. They have been doing this a long time! The major interest is whether there will be one or two more hikes this year and when the Fed’s balance sheet will be shrunk back to normal.

The dollar index had a quiet week last week not quite managing to re-attain the 100 level. The pound and Euro are still well supported for their own reasons and the market is in a pretty neutral pose regarding risk.

U.K. economy slowing

Fridays release of preliminary GDP data for the first quarter of 2017 shed a QoQ fall to 0.3% from 0.7% in Q4 ‘16.

The consumer is starting to worry about rising prices outstripping wages. Next week’s quarterly inflation report and MPC meeting will shed some light on official thinking but both may come too soon to see the effect of the relatively stronger pound on the inflation outlook.

It can be assumed that the report was completed following the General Election announcement so given its forward-looking bias it may not be as harsh as it could have been.

BoE Governor Mark Carney will take it in his stride but the vote will see at least one for a hike.

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