It all stems from credibility

Maybe its déjà vu, but October 2019 feels like a moment of change. If you follow major headlines, a Brexit withdrawal agreement is nearing a vote in Parliament, and there’s a reasonable chance of passage; and Chinese negotiators have confirmed the ongoing trade talks are making tangible steps towards a partial trade deal. Markets have appropriately rallied on this news, but it isn’t clear if it will last. To get a more objective sense of the potential impact lets shift perspective somewhat.

For the UK, the operative question is what remains to be done before the collective national focus can once more return to the domestic agenda. Let’s imagine the withdrawal agreement is finally done. In that case, we would have another deadline to agree on fresh trade deals with most of our key trading partners, and we haven’t even begun to discuss the goals yet. Given the diversity of perspective on the exit agreement, it seems unlikely we would see a majority view on the best approach. For one thing, these new trade negotiations touch on a critical Brexit nerve, regional inequality. After all, one of the key drivers for Brexit was that the preponderance of prosperity accrued to London and the home counties. The fault is surely malinvestment and lies with Westminster, rather than the EU, but these negotiations will provide a fresh platform to bicker over regional priorities. In order to have a united front that pursues the national good, there must be trust in the government that decides the internal accounting will be fair. That’s the rub; it's fundamentally a problem of credibility.

Let’s take the same approach with the interminable US-China trade talks and assume they have made an agreement. Let’s even be generous, despite the paucity of supporting evidence, and assume some substantive structural reforms are part of the agreement. The operative question is, does the removal of the US-China trade dispute magically imbue the real global economy with a burst of speed? For a while now, we’ve begun to think of the trade dispute like an ear-piercing. The body is forced to redistribute blood flow around the open wound, its painful and irritating, but removing the earing in time won’t return things to the way they were before. Eventually, the wound will close over, but a scar will remain, and so with underlying trade dynamics. The trade flow redistribution is already underway, the ongoing conversations are an irritant to ongoing business but agreeing a new deal won’t return the economy to its former state. The reason for slowing growth is partly about confidence but also very much about developed nations seceding the responsibility of prudent investment. Other than the wall, Donald Trump’s investment policy has been tax cuts and little else. It is no secret that a majority of political postings within the US Administration have lain vacant since Trump entered office. After all, if you have no intention of funding scientific discovery or environmental protection, why bother assigning the staff to those departments in the first place? JP Morgan Chase International Chairman, Jacob Frenkel, voiced similar thoughts on Bloomberg radio last Friday. To paraphrase, he said we are paying the price for a decade of chronic government underinvestment. 

Bottom line: The way the news cycle focuses our attention on political risk events causes to heap upon them a causality that isn’t realistic. It leads to the subconscious belief that to resolve them will leave us in a much better position; forget it, it’s an illusion. The problem lies in poor leadership focused on short-term wins. The true signs of better potential growth lie in a nationally coherent trade strategy mapped out in Westminster and discussions of a return to government investment in the US. 

GBP

Last week, the Pound extended its rally due to the decreased likelihood of a no-deal Brexit, reaching highs of 1.2990 against the US Dollar and 1.1661 against the Euro. With Johnson’s new Brexit deal expected to be voted within Parliament as early as Monday afternoon, Sterling’s gains could be extended considerably, or quashed if Johnson loses the vote. There are no notable economic data releases for the UK this week, but markets will be reacting to Brexit procedures and their outcomes.

EUR

Last week, the Euro Index surged above its 50-daily moving average and opened this week’s trading just 0.4% away from the 100-daily moving average – a level that could provide resistance for the common currency this week. The European Central Bank (ECB) will update markets on monetary policy and hold a press conference following its announcement. While no changes to monetary policy are expected, the meeting will be the last for ECB Chief, Mario Draghi before Christine Lagarde takes over in November.

  • The first release of major European data will be out on Thursday with Flash Manufacturing and Services PMIs from Germany, France, and the Eurozone as a whole. The general trend for all releases is an uptick from last month, with manufacturing in decline and services in expansion.
  • On Friday morning, German consumer and business climate survey data will be released, providing one of the most up-to-date health checks of the German economy. Expectations are for a slight decline from September’s readings. The business climate reading will be more important to markets as it sits at its lowest point since 2010.

USD

Last week, the US Dollar Index extended its decline, breaking through the 50, 100, and 200-daily moving averages reaching two-month lows. Although the economic data calendar for the US is light this week, the releases will provide an insight into how the US supply-side is coping with the global economic slowdown. A deteriorating supply chain could indicate the beginning of broader US economic weakness.

  • On Thursday afternoon, month-on-month Core Durable Goods Orders will be released, and expectations are for a contraction of -0.2%, down from an expansionary 0.5% in September. The measure shows the change in orders placed with US manufacturers, excluding transportation items, providing an indication of the health of the US manufacturing sector.
  • Also on Thursday is October’s flash Manufacturing and Services PMI. Expectations are that the US manufacturing sector continued expanding over the past month, albeit at a slower rate than the previous month. The Services PMI is expected to come in stronger than manufacturing, showing a higher rate of expansion than previously.