IFX Market Report
Thursday 9th February 2017

Market Report

Prime minister Theresa May had a successful day in Parliament yesterday as the House of Commons approved the ‘hard Brexit’ bill with a 494 / 122 majority, now providing the House of Lords approve, then The PM will have the right to trigger article 50. Most believe the upper chamber will provide little resistance as if they did, then there would likely be a significant public retaliation. The House of Lords is made up of un-elected individuals, while Commons is made of elected individuals, some of which were famously anti-Brexit. Most of those politicians adopted a stance of respecting, as May puts it, ‘the will of the people’, and have not pushed against this too much. If a group of un-elected individuals now try and block a majority vote won by the public and now approved by the House of Commons, the backlash would be automatic.

The process for approval through the House of Lords will commence on 20th February and the government wants the legislative process to be completed by March 7th. Recently, the poll activity in favour of Scottish independence and also discussions of how much the UK is going to owe after it leaves have both accelerated, regarding our final settlement bill with the EU, although there is still much to debate, it appears that a formula is being discussed as opposed to a flat fee. The estimate from Brussels earlier in the year of €55bn to €60bn has been agreed is a “very rough estimate”. Developments relating to this ‘get out’ fee will be monitored closely.

The GBPEUR rate continued its climb and managed to push up to just under 1.175 from news that Article 50 appears to be on track as parliament voted 494/122 in favour of giving May the right to trigger Brexit. At present, sterling struggles push through these levels of resistance and accordingly moved lower, although it is still holding comfortably over 1.17. This morning saw the RICS house Price Balance post a better reading of 25% from 23% expected. This evening (1830) we have Mark Carney due to speak at the BoE Inclusion reception. GBPEUR has spiked this morning and now trades 1.50% above Tuesday’s low at 1.1748.

As with GBPEUR, Sterling remained strong against the ‘greenback’ yesterday. GBPUSD managed to hold onto rates above 1.25 from the decisive Brexit stance from parliament and continued during a lack of information from across the pond. Today some more fundamentals are due for the USD in the form of Unemployment claims (13:30), and then just after 18:00 a speech from FOMC Member Evans. Not much is expected from this speech but it will undoubtedly be picked apart for any clues or further indications for the start of Fed rate hikes. GBPUSD has spiked this morning and currently changes hands 1.87% above Tuesday’s low at 1.2577.

Worldwide News

EURUSD trade would dictate that Eurozone election fears, currently outweigh the uncertainty in the U.S. at present, as the single-bloc currency trades lower against the ‘greenback’. The pair is clearly trading on weighted Geo-political risks, however is clearly also trading on ‘diverging monetary policy’ between the EU and U.S. While many continue to speculate over the probability, the Federal Reserve FOMC has the potential of three rate hikes in 2017, furthermore Trump has not yet unannounced hit fiscal stimulus plans to boost the dollar and if well-executed, cutting domestic regulation, allowing business’ to work better with each other driving domestic production.

The EUR has been plagued with issues for some time, Greece is rearing its ugly head again, Dutch and French right wing leaders are stating if appointed they will push to leave the EU also and there is the issue of QE and just how long the ECB plans for this to continue. The EUR has had a good run against the USD but the falls we have seen this week could well be the new trend for this pairing for a while.

European election fears have given the dollar a chance to gain. The markets have been awaiting information relating to business tax reform and infrastructure spending, and as soon as we hear of this the markets may respond favourably. We have seen just how high the dollar can climb, amid speculation in the wake of trumps election, since then the markets have corrected but a combination of concerns from Europe and a potential announcement about US fiscal policy could cause the USD to really surge. Today’s unemployment data is the penultimate piece of high impact data before the preliminary University of Michigan Consumer sentiment survey is released on Friday.

In our April 2016 Brexit report we spoke of Germany’s beneficial relationship with the Euro, as a parity currency union means that an increase in exports (within the bloc) is not followed by a strengthening currency, which has led to a 10x multiple on the German export surplus in a couple of decades. The 2016 export surplus has this morning been announced at a record-setting €252.9bn (£215bn) which as Germany Federal agency said; "clearly exceeded the previous peak of 244.3bn euros achieved in 2015". Last month Trump’s key trade advisor, Peter Navarro accused Germany of exploiting “a grossly undervalued” euro to its advantage. This morning’s data will no doubt add to US – EU trade tensions.

City trades have now began to add another tool to their screen, a Trump twitter feed. Recently the President’s social media activity has impacted the value of FTSE 100 shares by as much as 5%, which James Bevan, CIO at CCLA Investment Management says is ‘unprecedented’ he goes on to say; "What we're talking about are people whose political context is much less well known [than the Obama administration], and people are going to grab for anything that gives them an insight as to where policy is going.".

Car sales in China have plummeted 10% in just the month of January, when compared to a year earlier. The China Passenger Car Association overnight released data to Reuters that car sales fell to 2.1m units in January. The economic problem of growth concerns in China, will be a key theme this year as the ‘factory of the world’ and the market with the largest emerging middle class in the world will be need to be a key contributor to a global economic recovery.

A report from French banking giant, Société Générale this morning is pointing toward EURUSD parity potentially being within three months. Of course they did add a caveat of ‘close to parity’ and they did explain that if Le Pen doesn’t win the French national elections, then a significant rebound in the Euro may follow.