Market update: Brexit negotiations set to intensify as trump criticises the Fed again

Tuesday 28th of August 2018.

LAST WEEK – KEY TAKEAWAYS


BREXIT NEGOTIATIONS TO INTENSIFY OVER COMING MONTHS

  • The EU’s chief negotiator Michel Barnier met with UK Brexit Minister Dominic Raab, pledging to ‘negotiate continuously’ as the two sides try to come to an agreement over the next few months;

  • The British government published 20 technical notes covering the potential consequences of a ‘no deal’ Brexit. Raab played down the prospect, while Foreign Secretary Jeremy Hunt appealed to the EU to take a constructive approach to negotiations;

  • EU financial services chief Valdis Dombrovskis welcomed the City of London’s proposal to align its financial regulations with the EU after Brexit (known as equivalence), but he warned access to the single market could not be taken for granted;

  • Omnis view: A report released by the International Monetary Fund last month argued that a ‘no deal Brexit’ would impact Europe, although to a lesser extent than the UK. We think it is in the best interests of both parties to reach an agreement. We remain underweight UK equities, but we believe prices reflect a reasonable degree of pessimism. Any softening of the rhetoric could therefore see domestic UK equities rally and sterling rebound.

TRUMP CRITICISES THE FED AS TRADE TALKS RESUME WITH CHINA

  • US President Donald Trump criticised the Federal Reserve for raising interest rates and accused China and Europe of manipulating their currencies, both of which reduce the impact of trade tariffs;

  • Low-level trade talks resumed between the US and China. However, little progress was made as the US side blamed China for failing to address its fundamental concerns;

  • Meanwhile, the US imposed tariffs of 25% on $16 billion of Chinese goods, outlined a few months ago, and China responded in kind;

  • Omnis view: The markets seem to be waiting for any indication President Trump is softening his stance with China. He might agree trade deals with other countries, but he is unlikely to back down with China ahead of the midterm elections. That means the next round of tariffs on $200 billion of Chinese goods may go into effect by the start of September. We expect this to further dent sentiment towards emerging markets (EMs).

POSITIVE OUTLOOK FOR US ECONOMY AS BULL MARKET HITS RECORD

  • The S&P 500 hit a record high, propelled by strong corporate earnings and President Trump’s tax cuts, as the post-crisis recovery became the longest-running bull market on record;

  • According to the minutes from the Federal Reserve’s latest meeting, a positive outlook for the US economy increases the likelihood of two more interest rate hikes this year. Nonetheless, some policymakers worried that rates would be too low to cut if faced with a recession;

  • Addressing the annual Jackson Hole meeting of central bankers, chairman Jay Powell said the Fed does not expect the US economy to overheat, and he defended its gradual approach to raising interest rates;

  • Omnis view: A robust US economic outlook should be positive for global growth and risk assets, including equities, but recent weeks have demonstrated the extent of the imbalances engendered by this outlook, with the strength of the dollar creating issues for a number of EMs and dominating the performance of many international financial markets. However, we expect US leadership to lessen, relieving some of these pressures to a degree.

TRUMP RULES OUT CONCESSIONS TO TURKEY AS CHINA AND VENEZUELA LAUNCH STIMULUS

  • In Turkey, the lira weakened against the US dollar, and the economy continued to struggle, as President Trump refused to ease sanctions and tariffs on the country;

  • The People’s Bank of China injected $22 billion into the Chinese banking system, as it sought to overcome slowing growth by increasing the availability of credit to companies and local governments;

  • Venezuela tried to curb spiralling inflation by devaluing its currency, cutting fuel subsidies and raising the minimum hourly wage. It pegged the bolivar to the ‘petro’, a state-managed digital currency which the government claims is backed by oil, gas, gold and diamonds;

  • Omnis view: Our portfolios have limited exposure to Turkey, either directly or through European companies with interests in the country. While we do not see Turkey’s troubles spilling into other EMs, there is a risk in pushing such a strategically-located partner towards Russia. We retain overweight positions in EMs and still believe valuations are attractive, supported by decent fundamentals.

ITALIAN GOVERNMENT BONDS RALLY AMID CONCERN OVER RISING BORROWING COSTS

  • Italian government bonds rallied after ratings agency Moody’s put off a decision about downgrading the country’s credit rating;

  • Italy called on the European Central Bank to carry on with its bond-buying programme amid fears that borrowing costs could increase once the stimulus ends in December;

  • Elsewhere in the EU, Prime Minister Alexis Tsipras welcomed the end of Greece’s third and final bailout, but he warned of further challenges as his government prepares another tight budget for 2019;

  • Omnis view: As the third largest economy in Europe, we will be monitoring volatility in Italy’s government bond market and the potential impact on sentiment elsewhere in the eurozone. It is likely to continue until the coalition government agrees its first budget. However, our portfolios have limited exposure to Italian bonds.

LOOKING AHEAD - TALKING POINTS


JAPAN AND EU PUBLISH UNEMPLOYMENT FIGURES

  • Japan releases its unemployment figure for July on Friday, with the consensus view that it will remain unchanged at 2.4%;

  • The EU also announces its monthly unemployment rate for July, and economists expect little or no change to the current rate of 8.3%;

  • Omnis view: Despite tightening global labour markets, there has been limited evidence of sustained and significant wage growth or inflation so far. This should permit monetary policy to remain relatively accommodative.

EURO AREA UNEMPLOYMENT RATE (1995-2018)

Bulletin - 280818

Source TRADINGECONOMICS.COM and Eurostat

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