Politics create market volatility

Tuesday – UK politicians vote on whether to accept the Brexit deal on offer from Brussels, enabling an orderly Brexit on March 29th.

Tuesday – US inflation data could provide impetus for the Federal Reserve to conclude its quantitative tightening scheme.

Wednesday – UK politicians stand to vote on whether to leave the EU with no deal on March 29th.

Thursday – UK politicians stand to vote on extending Article 50 beyond the March 29th deadline.

Friday – Eurozone inflation data will be released. A sharp downturn may raise concerns that the European Central Bank’s (ECB) stimulus measures should have been announced earlier.

Monday

US Retail Sales for January will be out. Forecasts expect to see a 0.3% month-on-month rise from a 1.2% decline in December. Such a resilient performance, despite the government shutdown which would have impacted consumption at the start of the year, again suggests that the US economy remains on a strong footing.

US Business Inventories for December will print and is expected to show a modest return to growth at 0.3% against the November figure of -0.1%. This number has forward-looking qualities as growing stockpiles of goods can indicate confidence over the economic outlook, but a lot has changed in recent months. The Dollar is unlikely to find much cheer from an uplift here.

Tuesday

The UK Gross Domestic Product (GDP) reading for January is set to be published. This may convey something of a pre-Brexit bounce as business activity was reported as increasing at the start of the year. As such, caution should be used when considering what this means for the months ahead, but expectations are for an annualised figure of 1.2% to be reported, up from 1.0% a month ago. A number significantly above this may lend some support to the Pound despite the ongoing distraction of Brexit.

US inflation for February is expected to come in unchanged at 1.6%. This reading is especially significant right now as a weakness here will push the Federal Reserve to end its quantitative tightening program sooner than may have otherwise been expected. This, in turn, would have the potential to see the US Dollar weaken across the board.

The UK Parliament is also scheduled to vote on Brexit again today. This is arguably Theresa May’s last chance to retain control of the process, but current expectations are that politicians will not be endorsing the deal as it stands. This is arguably the last chance for the UK to leave the EU on March 29th with a deal, although removing one line of uncertainty could end up being positive for the Pound.

Wednesday

Eurozone Industrial Production for January is expected to remain depressed, although the forecast -3.6% isn’t quite as bad as the -4.2% seen in December. However, it does serve as a reminder as to just how strained the Eurozone economy is currently and although the ECB may have started down the path of stimulus measures, without an upturn in global trade being seen, the outlook remains bleak. A shortfall in this print could see the Euro slide further.

Assuming Theresa May loses Tuesday’s vote, politicians in Westminster will today debate whether the UK should leave the EU without a deal. Such a hard Brexit is unlikely to see majority support as it would be profoundly damaging to the UK economy. In the event such a deal was passed, Sterling could be expected to crash significantly lower against both the Euro and the US Dollar. However, on the basis that won’t happen, the removal of a second line of uncertainty has the potential to lift the Pound.

Thursday

German inflation data for February is set to be published, with a modest uptick to 1.6% being forecast after January’s print of 1.4%. This upswing would certainly be applauded, and moves by the European Central Bank to increase liquidity among banks again should help shore up inflation, but numbers like this are still meaningfully below levels which ought to be seen around 2.0%.

US New Home Sales for January will be released, with a forecast reduction of 1.3% against December’s 3.7% jump. The US government shutdown and severe cold weather have likely acted as a drag here, but this metric is still a good forward-looking indicator regarding economic confidence. However, given those seasonal factors, the market may be willing to shrug off any disappointment.

Again, assuming votes over the last two days in the UK Parliament have failed, today will see politicians polled on whether Article 50, the process of exiting the EU, should be delayed beyond the March 29th date. This is likely to be passed in a move that ought to be positive for the Pound. Either the UK ends up with a better deal, or the whole idea could even be annulled, although such a situation isn’t entirely risk-free. An extension is only possible if all other EU member states agree, so short-term objections could emerge from those with their own national agendas to pursue. Regardless of how politicians vote. A small risk remains that the UK could still crash out of the EU, with the same damaging consequences for Sterling.

Friday

Eurozone inflation data for February will be published, and again there’s an expectation that January’s lull can be bettered with a move from 1.4% up to 1.5%. As noted above, the ECB has already taken steps to prop up the economy which will take some time to feed through to the real economy. However, with the ECB’s inflation target below 2.0%, any weakness could translate into further selling pressure for the Euro.

The University of Michigan Consumer Sentiment index for March is published and again brings with it some valuable forward-looking information. This reading peaked in the wake of tax cuts at the start of 2018 and has been broadly trending lower ever since. February’s figure was originally 95.5 but was subsequently revised down to 93.8. With 93.0 forecast this time around, again there’s evidence of a slowdown, and this will add weight to calls for the Federal Reserve to act. The US Dollar may stumble as a result.