No Confidence?

19th November 2018 Market Update

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?? GBP - Depending on who you believe, the leadership challenge to Prime Minister Theresa May is either still a long way off securing the 48 names required to trigger a vote of No Confidence; or a matter of when not if. In response, over the weekend – PM May warned that a formal leadership contest this late in the game would only ‘delay Brexit.’ Whether we reach the magical 48 remains to be seen, but the market seems sure that Tory dissenters will not achieve the 150+ votes required to unseat the Prime Minister as part of any leadership challenge. In support of this, political analysts suggest she is ‘doomed to carry on leading us through this mess because there isn’t anybody else’ (Kenneth Clarke). On the other hand, there also appears to be little support for May’s Withdrawal Agreement, meaning its chances of getting through Parliament remain slim and with the EU showing no sign of willingness to rework the plan, it will be difficult to see where she could make progress from here. As such, Sterling continues to fight an uphill battle, as it remains at the lower end of its four-month range with significant downside risk going forward.

?? USD - Last week saw a more negative Dollar theme emerge following a number of speeches given by FOMC members which collectively indicated that the slowing global environment should be considered in any Fed rate decisions going forward. In turn, Dollar sentiment turned more bearish as the likelihood of further interest rate hikes were brought into question for 2019. As such, today’s upcoming speech from the Fed’s John Williams will be closely watched to see if the market were overreacting or if this is the beginning of a change in Fed thinking. Indeed, looking towards 2019 - the US economy is facing some headwinds with the lagged effects of higher interest rates and a strong Dollar likely to slow growth. As such, similar to the Fed speakers – analysts at Morgan Stanley, Goldman Sachs and Credit Agricole have all indicated that the American currency is about to weaken. However, amongst all this doom and gloom, a December rate hike still looks to be very much on the cards and the data out this week is unlikely to change that; with the economy going strong; inflation being above the Federal Reserve’s 2 per cent target; and the job market remains robust with wage pressures on the rise. In addition, over the weekend – US’ VP Mike Pence reaffirmed that America has no intention of changing their course on China with plans to increase tariffs to 25% across the board. As a reminder, a continuation of trade tensions should help the Dollar strengthen on safe-haven demand.

?? EUR - Italy is showing a greater willingness to open some dialogue with the European Commission over the country’s budget plan for next year, but have remained firm on the level of spending required to boost growth in Italy. According to Deputy PM Di Maio, Italy was ready to make ‘major cuts on wasteful spending’ as the market await the response of the European Commission, due on the 21st November. Separately, there has been some encouraging support for a new EU budget from the French-German axis, but this is unlikely to be a major game-changer for EUR/USD near term. Looking ahead this week, the Eurozone calendar is relatively light, with the highlight being November PMIs on Thursday which should shed some further light on whether Q418 can be any better than a miserable Q318 for Eurozone activity. With downside risks ever present, a strong bounce back from the weak Q3 performance seems unlikely despite the ECB continuing to back a return to positive growth; all of which means a soft Euro leading into this week.


GBP: UK Prime Minister May clings on to her position as talk of a No Confidence vote goes on;
USD: Late last week the sentiment around the Dollar took a sharp turn as Fed speakers strike a more bearish tone;
EUR: The Eurozone’s weak performance will be monitored through the conduit of PMIs this week, with no expectations of any strong bounce back;


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