Mirror mirror on the wall, what’s the most pressing political development of them all?
Today's news headlines:
- ‘Two top UK officials vow to quit If Boris Johnson becomes next PM'. Chancellor of the Exchequer Phillip Hammond will resign if Boris Johnson comes into power. Members of Johnson's Cabinet must be prepared to support a no-deal exit, and Hammond has previously stated his will to fight against a disorderly exit. Hammond joins Justice Secretary, David Gauke, in pledging his resignation if Johnson is victorious. (Bloomberg)
- ‘Shares on China tech exchange gain up to 520% in trading debut'. Billed as China's answer to the Nasdaq, shares in Shanghai's science and technologies' Star Market' rocketed on the first day of trading. China hopes it will encourage investment in domestic tech companies and provide resilience in the face of its trade war with the US. (Financial Times)
The UK’s untimely distraction
It's awkward timing; while UK politicians are trying to select Theresa May's successor and debate Brexit solutions, geopolitical tensions are rising and diverting focus from delivering Brexit on time. Over the weekend, Iran seized a British oil tanker, as part of an ongoing dispute over the oil embargo of Syria, which has escalated the British political response. Immediately following the event, the UK demanded the immediate release of the seized British vessel and threatened 'serious consequences' of further action. On Tuesday, May officially resigns, and the new PM takes control of Number 10 on Wednesday—an odd transition point while the issue continues to develop. What's more, with just over three months until Britain is due to leave the EU, the UK will need a quick resolution to Iranian tensions to get on track to successfully deliver Brexit in October. This is a big ask in the current epoch.
Bottom line: As slowing global growth weighs on oil demand and prices, a shift in focus to the Strait of Hormuz and the current tensions with Iran could result in an uplift in the value of black gold. With the UK focused on the appointment of a new Prime Minister this week, the headache of tensions with Iran may also add weight to an already weak Pound.
Predicting the path
The interesting debate over the past few weeks has been whether the Federal Reserve should cut interest rates by 50bps, 25bps, or not cut at all. Following several Fed speeches last week, the US central bank has now made it patently clear that it will be cutting the benchmark rate at the end of this month. Despite strong domestic data releases, leaving rates unchanged has effectively been taken off the table. On Friday, Fed member James Bullard stated he’d be satisfied with a 25bps cut at the upcoming meeting, while he also eased concerns that there will be a protracted cutting cycle. This is particularly telling as Bullard is one of the bank’s most dovish policymakers and was the only member to vote for a rate cut at the June meeting. The Dollar strengthened, and Treasury yields rose as markets scaled back pricing of an aggressive 50bps cut from 40% down to 20%.
Bottom line: The Fed clearly sees enough weakness in global indicators to get out and ahead with a pre-emptive rate cut this month. Despite recent better-than-expected domestic data releases, Fed funds futures still price in close to three rate cuts before Jan 20. This seems unlikely, and a scaling back of these expectations could result in a new wave of Dollar strength.
Flat trading for the Sterling Index combined with broad Dollar strength moved the pair lower in Friday's session and has continued into this morning. The 100-day moving average crossing the 200-day reinforces the bearish outlook for the cross.
On Friday, losses for the Euro trade-weighted Index provided some much-needed support for the pair. The Euro suffered as reports emerged that the European Central Bank (ECB) was considering revising its inflation targets, along with the prospect of a potential rate cut this week.
The Euro could remain under heavy pressure this week as markets await the ECB meeting this Thursday. The recent rebound in the EUR/USD 50-day moving average could be temporary, pushing the pair back towards May's lows.