Forging a trail forward

Today's news headlines:

‘U.S. says Phase-One China Deal would include Tariff Rollback’ – Both sides of the trade war have agreed to roll back tariffs against one another as progress is made towards an initial deal. Any agreement to scale back levies would pave the way for a significant de-escalation of the tensions that have cast a shadow over the global economy. White House economic adviser, Larry Kudlow, confirmed the advance in negotiations but trade adviser, Peter Navarro warned that only President Trump can make the decision to remove existing tariffs. (Bloomberg)
‘Bank of England ready to cut rates if economy slows further’ – The BoE signalled that they are ready to lower UK interest rates due to the risks of a global economic slowdown. Two members of the Monetary Policy Committee voted to immediately lower interest rates, with the overall mood reflecting a slowdown in underlying UK growth through 2019. BoE Governor, Mark Carney, maintained that central bank’s forecast was for improved growth based on an agreed Brexit deal that would reduce uncertainty for businesses. (FT)

Searching for the accelerator

It feels like the market is sitting at a traffic light, waiting for it to turn green. Christine Lagarde is carefully searching for the gas pedal in the Eurozone, the various UK election candidates are also promising (or perhaps over-promising) fiscal investment, while the US is only trying to lift its foot of the brake.

Bloomberg have produced a wonderfully informative visual of EU area countries showing their fiscal space – inferring an ability to increase government spending to spur growth – but there is still a long way to go before the conservative core change their long-held views. Now that German growth is clearly marginal, we might actually see an appetite amongst the German old guard for a loosening of purse strings.

The market is understandably wary of the UK election spending pledges, but there are some positives to consider as well. Firstly, actual policy seldom resembles fanciful campaign trail rhetoric. Secondly, well considered deficit spending could be a great move for the UK given the presently low level of interest rates, even when it dramatically expands the government debt burden. Arguably, if constructive long-term projects are selected (e.g., not tax cuts, etc), the market would likely view the additional spending in a prudential light. You wouldn’t wish for this to be a sustained policy but following a period of anaemic investment the answer is not austerity.

On the US front, little has changed…we are still waiting for confirmation of reduced trade barriers. More meaningful reform is nowhere on the horizon, but at this stage the market would settle for a lack of obstacles to forward progress.

Bottom line: Don’t get us wrong, the current fundamental view is low for both UK and EU. There is however an opportunity in plain sight, but it requires organisation and cross-party collaboration to capitalise on it. We need to collectively turn the page on the current small-mind brand of politics and work on forging consensus where it can be found. Where the market views UK spending as a danger when directed by partisan hands, a broadly supported and well considered plan would likely receive a totally different reception. We’re just waiting for the conversation and the economic gas pedal.

GBP/USD

A “Dovish Hold” from the Bank of England meant that Sterling swung over 0.5% lower on the US Dollar during yesterday’s European session. Sterling’s trade weighted index posted a modest recovery, but the Pound remains in the low 1.28’s against the Greenback due to fresh appetite for Dollar buyers.

GBP/EUR

Yesterday, Sterling posted significant two-way moves against the Euro following the BoE’s interest rate decision and downgraded forecasts for growth and inflation. This morning, we’re back trading at pre-decision levels just above the 1.16 handle as markets await further UK political developments to provide some Brexit clarity.

EUR/USD