12th December 2018 Market Update
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🇬🇧 GBP – Headlines out this morning were all focused on the news that Theresa May is set to face a leadership challenge from within her own party. This is after the 1922 Committee, a group of influential backbench members of parliament, proclaimed they had reached the required 48 letters of no confidence in the PM to trigger a leadership vote between 6pm and 8pm tonight. The main trigger for this was May’s decision to delay the Brexit vote that had been scheduled for last night, as she attempted to achieve some last-minute concessions from the EU on her Brexit deal – a task which at this point looks entirely impossible. In terms of likely candidates to run against May, current bookmaker’s odds have Boris Johnson as the favourite, just ahead of Dominic Raab and Michael Gove; but whether or not any of these MPs will get the required 158 of 315 votes to oust May remains in question. In terms of the broader Brexit picture, the House vote on May’s Brexit deal could now be delayed for six weeks which would likely require the government to extend the deadline for Article 50 as well as increase the likelihood of another referendum; these two factors combines have caused Sterling to strengthen 0.4% against the Dollar and 0.3% against the Euro this morning. Perhaps there is also some hope that these further delays may buy more time to help Britain avoid a ‘No Deal’ Brexit. Indeed, all of this uncertainty had Sterling breaching new lows last night, as GBP/USD hit 1.2478, which is the lowest rate we have seen since April 2017.
🇺🇸 USD – Looking ahead today, markets will be paying close attention to US CPI data as investors continue to look for new clues as to the outlook for monetary policy in the months ahead. As a reminder, throughout 2018 the Fed has remained fairly hawkish as part of a view that we may see up to three rate hikes in 2019, but as the year has progressed – the forward guidance has become more and more dovish as a ‘wait and see’ approach has become the favoured method of the Fed going forward. This is after a perceived slowdown in growth in the US as well as its ongoing trade disputes with China as both parties have proceeded to slap retaliatory tariffs on each other’s imports and exports over the past few months. The good news is that yesterday, China indicated that it would cut US automobile tariffs from 40 per cent to 15 per cent, which is the same as all other countries and while this will not significantly close the trade gap between the two parties, it indicates the will of China to come to a truce. Similarly, President Trump told financial news outlet Reuters yesterday that he would intervene in the case against the CFO of China’s Huawei Technologies if it would serve the national interest and help close a trade deal with China. As a result, the Dollar was able to strengthen on hopes of better growth in 2019. As well as this, the weakening Pound is also providing a key boost as speculative investors look to sell the Pound due to its depressed levels.
🇪🇺 EUR – While the temptation would be to spend this morning talking about the impact of Brexit on Europe, there are actually some very significant events occurring across the channel in France. In response to the country-wide protests against fuel tax rises, living costs and other social issues, French PM Emanuel Macron has promised to boost the minimum wage, lower tax on overtime earnings and asked bosses to give their staff an end-of-year bonus. Unfortunately, his efforts have served to neither placate the ‘yellow vest’ rioters, but will also likely cause France to blast through the fiscal limits applied to it by the Eurozone. The reason this is so significant, aside from the obvious ironic parallels it draws with Italy, is that it completely goes against his reputation as the champion of the EU and the guardian of French public accounts as a downgrade of the country’s debt becomes a distinct possibility. Naturally, Italian ministers are also watching on with great interest with Giovanni Tria yesterday claiming that the government would not make major changes to their budget, which has, in turn, revived concerns over Italy’s deadlock with the European Commission. Looking ahead this week, tomorrow we have the all-important ECB meeting which will provide a longer-term view on the Eurozone, amongst all of this short-term noise.
GBP: 1922 Committee trigger Conservative leadership challenge after 15% of the Tory Party indicate their lack of confidence in Theresa May;
USD: CPI in sight as trade talks with China show some positive signs of progress;
EUR: Macron facing a revolt in France as he struggles to placate ‘yellow vest’ rioters.
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