Prepare for the worst

Over the weekend, we learned that the UK government is getting set to propose legislation that is contrary to the withdrawal pact signed last October. According to the Financial Times, Chief UK Brexit Negotiator David Frost was a key driver of the move, which would change elements dealing with North Ireland customs and state aid. It's also rumoured that the Autumn Budget would encroach upon tariffs entering Norther Ireland, a third tenet of last October’s agreement. With a firm deadline of October 15th and the likelihood of a Brexit agreement fading fast, the UK government is taking a more aggressive tack to endgame negotiations. Boris Johnson has commented on a no-deal exit, saying: ‘I want to be absolutely clear that, as we have said right from the start, that would be a good outcome for the UK.’ Suffice to say, the Pound Index has been on the back foot since the beginning of the month and is set to approach the 200-day moving average any time now. Although it isn’t a great surprise to anyone, it seems a no-deal Brexit could be very much on the cards in Q4 of this year.

Turning to the US, Donald Trump is in his favourite position: attacking from the front. According to the Treasury Secretary Steven Mnuchin, the President couldn’t be more pleased with the way the US recovery is progressing, much to the chagrin of the Democratic challengers who have recently lost traction on their criticism of the President’s handling of the coronavirus. Joe Biden and Kamala Harris are also trumpeting the resurgence of Russian trolls, who acted during the 2016 election to sway voters towards Donald Trump, but the President is countering. According to the Trump Administration, Chinese trolls—who allegedly promote anti-Trump propaganda—are the biggest issue, ranking Russian interference a solid third after Iranian interference. Perhaps the problem is one of measurement because the evidence is rather difficult to string together into an unassailable proof so that the President can very well say whatever he wants with a reasonable amount of credibility. 

Although Joe Biden seems to be holding onto his poll lead, the President has seemingly recovered all losses from the end of May suggesting his handling of the Coronavirus is not a key driver of polling data and potentially not a stratagem for success in November.

Bottom line: Unlike Brexitwhich has been a disaster from start to finishthe Presidential election is way too early to call either way. 
The timing is rather unfortunate because party politics will make a second stimulus effort that much harder to reach and impact many millions of Americans in Q4 of this year. From a Democrat perspective, the fear is that passing another bill could refurbish Trump’s Economic record in time for November voting, while an expiry of benefits in October would put a serious cramp in Trump’s self-aggrandising narrative. This, of course, makes a massive assumption that the Democrats could win the blame game, a field where Trump is the reigning champion. Last week’s US economic data showed a distinctly positive trend
another sizable fall in unemployment claims and a rise in average hourly earnings—which also makes an economic case against the President that much harder.  


The week ahead

GBP

Last week started strong for Sterling as it extended its recent break above the trade-weighted 200 daily moving average. The Pound fell just short of 1.35 against the US Dollar and 1.13 against the Euro before familiar negative Brexit headlines began to appear mid-week. This week, reports are that the UK is preparing for Brexit talks to fail, with Johnson expected to tell the EU he is willing to walk away without a trade deal. With Brexit on the horizon once again as well the government’s furlough scheme ending in a few weeks, Sterling could come under pressure over concerns over the UK’s labour market and the risk of a no-deal Brexit.

  • Tuesday’s BRC Retail Sales Monitor year-on-year is expected to show 3.5% growth down from 4.3% last month.
  • Friday’s Industrial and Manufacturing Production for July are expected to read 4.2% and 5.0% respectively, down from 9.3% and 11.0%.
  • UK GDP in July is expected to show 6.6% growth on Friday according to the Office for National Statistics, this is down from 8.7% growth in June.

EUR

Since the Euro’s rally in July, the common currency has been bound to a 1.5% trading range on its trade-weighted index. This week, the index opens bang in the middle of this range ahead of the European Central Bank (ECB) announcement on Thursday. Last week’s shock inflation figure which came in at -0.2% will be on investors’ minds during the press conference following the interest rate announcement, as well as a discussion around the Euro’s strength. Although no change in interest rates is expected (currently at -0.5%), the pressure is mounting on the central bank to inject more monetary stimulus to pick up inflation from its first negative year-on-year reading since May 2016.

  • German Industrial Production for July came in at 1.2%, lower than the 4.5% forecast.
  • Tuesday’s Italian Retail Sales for July are expected to show -1.0% growth after posting a strong 12.1% growth in June.
  • Tuesday’s Revised GDP figure for Q2 is expected to be unchanged from previous estimates at -12.1% growth.

USD

Last week, the Dollar closed in the green as its trade-weighted index climbed 1.5%. Despite the Greenback’s gain, the index remains in its four-week downward channel that needs Dollar sellers to overpower this week for the trend to continue. Monday’s US bank holiday could make it a quiet start to the week, but US inflation data combined with the ECB announcement on Thursday could bring more volatility at the tail-end of the week.

  • Thursday’s PPI figure for August is expected to read 0.2% growth in producer prices, down from 0.6% in July.
  • Thursday’s Jobless Claims is expected to show 845k people unemployed in the last week, down from 881k the week before.
  • Friday’s CPI figure for August is expected to show 0.3% growth in the price level, weaker than the 0.6% price growth in July.

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